Exchange-traded funds (ETFs) are versatile vehicles offering the chance for growth, passive income, or both. They often provide instant diversification due to the underlying basket of assets.
There are over 2,300 ETFs listed on the London Stock Exchange, so we’re pretty spoilt for choice in the UK on this front.
Here, I’ll look at an ETF offering a 5.31% dividend yield. This one’s also gathering a bit of momentum, having risen almost 8% since mid-December.
UK property
The fund in question is iShares MSCI Target UK Real Estate UCITS ETF (LSE:UKRE). As you can probably guess by its name, this ETF holds a range of property stocks in the form of real estate investment trusts (REITs). These pay out at least 90% of their rental profits as dividends.
Top holdings in this fund include Segro, Londonmetric Property, Land Securities, Tritax Big Box, and Primary Health Properties. The first three REITS are in the FTSE 100 while the other two are from the FTSE 250.
What I like here is that these stocks give extremely wide exposure to all sorts of property subsectors. These range from warehouses run by Amazon, datacentres, hotels, theme parks like Alton Towers, offices, healthcare (GP surgeries and local clinics), and more.
Another attractive feature is that it combines UK property stocks with UK inflation-linked government bonds. If the property market gets a bit choppy, the bond portion should act as a bit of a stabiliser.
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Pound/cost averaging strategy
As mentioned, the ETF currently sports a 5.31% dividend yield. This means someone investing £10k would expect £531 back in annual income.
But what if they haven’t got this sort of money? After all, 10 grand’s hardly pocket change. Well, there’s always a pound/cost averaging strategy that could be deployed. Instead of investing a large lump sum all at once, fixed amounts would be invested at regular intervals (say, £175 every month), regardless of whether the market’s up, down, or sideways.
This strategy would smooth out the natural fluctuations. And after five years of investing £175 a month in this ETF, they’d have accumulated £10,500 worth of shares. Based on the trailing yield of 5.31%, these would then be paying around £557 in annual dividends.
Now, I’ve simplified things for the sake of illustration here. In reality, the share price will move up and down, as will the yield. And while the dividend payout should hopefully rise over this period, nothing can be guaranteed. That’s why diversification would be important.
Also, perhaps inflation will creep back up, forcing the Bank of England to increase interest rates. In this situation, REITs would likely fall in value, putting pressure on the ETF’s share price.
Rates are heading lower
On balance however, I think this fund’s worth considering for passive income.
With interest rates forecast to keep falling in 2026, the cost of debt for REITs will likewise head lower. With cheaper debt, property companies can start buying and developing again. This should see money start moving back into the sector, boosting the ETF’s share price in the process.
