A 4.6% yield might not sound like much, but it would still generate £920 a year inside a £20k Stocks and Shares ISA. And the passive income would be completely tax-free.
What’s more, those returns would start compounding over time, creating a snowball effect.
Here, I want to highlight an exchange-traded fund (ETF) that I think is worth assessing for a new ISA.
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Basket approach
An ETF is simply a basket of investments (usually shares and/or bonds) that trade on a stock exchange. London is the leading exchange in Europe for ETFs, with more than 1,000 of them listed on the main market.
My own Stocks and Shares ISA is made up of growth stocks, dividend shares, investment trusts, and a couple of ETFs. Recently, I’ve been wanting to bolster the dividend side to increase the income my portfolio will generate in future years.
And iShares UK Dividend ETF (LSE:IUKD) has caught my eye. It holds 50 companies in the FTSE 100 and FTSE 250 that pay the highest dividends (excluding investment trusts).
As such, I would instantly get a lot of exposure to different stocks in various sectors. For example, it holds BP (oil), Legal & General (insurance and asset management), NatWest (banking), Admiral (insurance), Rio Tinto (mining), and British American Tobacco (self-explanatory).
These are all in the FTSE 100. From the FTSE 250, the ETF holds stocks like Taylor Wimpey (housebuilding), Primary Health Properties (a real estate investment trust), and broadcaster ITV.
If any of these firms cut their payouts, which is always possible, then the rest should ideally take up the slack. That’s assuming, of course, there’s not some terrible global event like another pandemic, where most businesses start suspending dividends.
Many global businesses
Due to the trust’s inbuilt diversity, I reckon I can sleep well at night with this dividend ETF. But given that it’s only focused on one market (the UK, obviously), it could lose value quickly if investors soured on London-listed financial stocks. This is a key risk.
On the other hand, many of the FTSE 100 stocks it holds are global businesses. For example, despite its name, just 1.05% of British American Tobacco’s revenue comes from the UK. And HSBC is increasingly focused on the growth markets of Asia.
So I think the income is more diversified geographically than the iShares UK Dividend ETF name implies. No stock is worth more than 4.8% of assets.
Passive income
The fund has jumped 24% in the past year, though April 2025 was a low starting point (President Trump’s tariffs sent stocks into a tailspin back then).
History shows big market wobbles like this end up being the best times to invest, and the share price recovery here proves it.
Despite this surge, the ETF’s still offering a decent 4.6% dividend yield. As intended, this is above the average of both the FTSE 100 (3%) and FTSE 250 (3.3%).
The dividends are paid out quarterly (March, June, September, and December). I’ll reinvest them, either into more of this ETF or elsewhere in my portfolio. Doing so will help fuel the compounding process (earning interest upon interest).
Finally, it’s worth mentioning that the ongoing charge is not particularly high, at 0.40% per year. All in all, I reckon this ETF is worth considering for long-term income.
