I love the idea of investing in exchange-traded funds (ETFs). Combined with specific shares in a Stocks and Shares ISA, they can provide instant (and exceptional) diversification to help investors spread risk.
But don’t think of them as stodgy safety nets. The returns on offer from these funds can be stratospheric, whether through growth-driven capital gains or dividend income. Take the iShares US Equity High Income Active (LSE:INCU), Global X SuperDividend ETF, and Invesco Morningstar US Energy Infrastructure — these funds offer dividend yields above 7%, far higher than almost every other share on London’s stock market.
If forecasts are correct, a £20,000 ISA invested equally across them will deliver £1,740 in passive income this year alone. So what makes them such terrific dividend payers?
9.4% yield
iShares US Equity High Income — as its name implies — targets dividends from New York-listed companies, and today offers 9.4% dividend yield.
But this particular fund doesn’t only hold shares. To provide a more stable income over time, it also has significant holdings in US Treasures as well as cash. This can also reduce share price volatility when the broader stock market drops.
Focusing on just the US creates more concentrated regional risk. But in other ways the fund is exceptionally diversified. It holds shares in 359 stocks spanning a range of tradionally dividend-paying industries, including financial services, telecoms, and healthcare.
Another reason I like this ETF is its high focus on information technology. More than 30% is dedicated to tech giants like Nvidia and Microsoft, giving it excellent growth potential to complement those dividends.
Global giant
The Global X SuperDividend ETF holds shares in dozens of different companies ranging far and wide, from the US and Brazil to the UK and Hong Kong. But investors don’t have to skimp on dividends to enjoy this benefit — today the fund carries an enormous 9% yield.
The fund focuses on traditionally high-paying companies like banks, energy producers, and real estate operators. In fact, it provides access to “up to 100 of the highest dividend paying equities around the world“. It also receives income from stable government bonds, including those issed by the US, UK, and Germany.
I’m also a fan of this fund because dividend income is paid monthly, giving investors access to their passive income sooner.
Power play
Invesco Morningstar US Energy Infrastructure MLP focuses on a naturally defensive sector. The benefit to investors? Cash flows stay robust across the economic cycle, meaning large dividends every year since the fund was created in 2010.
The ‘MLP’ in its name refers to ‘master limited partnerships.’ These businesses are used chiefly for midstream energy infrastructure, like pipelines, storage, and terminals. They also have to distribute most of their income to shareholders in exchange for tax breaks.
This results in this ETF’s enormous 7.8% dividend yield for this year. Infrastructure funds like this typically experience poor growth. But in my view, that’s more than balanced out by the excellent passive income they can provide.
