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The UK dividend ETFs I think income investors will love

Exchange traded funds (ETFs) are extremely attractive to both newer investors and seasoned traders alike.

They offer low costs, diverse exposure to a market and good returns, which will often outperform actively managed funds.

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From tracking the movement of a popular index, like the FTSE 100, to commodity prices like gold, an ETF is simply a collection of stocks gathered together in one basket. Think of an ETF as if you’ve grabbed a pencil and paper and drawn a box around a selection of top-performing shares.

Pick a UK dividend ETF and you’ll get the additional benefit of income return, which stacks up over time.

Highest dividend yield

The iShares UK Dividend UCITS ETF (LSE:IUKD) is one of the most popular UK dividend ETFs for good reason. Launched by Blackrock in 2005, the £726bn fund produces a 6.6% dividend that comfortably outstrips the market and is the best yield across all UK dividend ETFs.

Because of its popularity, there is excellent liquidity, which means investors can buy in and sell out easily when the price is right for them.

The ETF has a simple raison d’être: to collect together the highest-yielding FTSE 350 companies and pay out those gains to holders. You’ll find the ongoing charges aren’t excessive at 0.4%. And the proportion of each of the 50 stocks it tracks depends on the forecast dividend yield: so the best-paying companies make up a larger amount of the fund.

The fund has returned 9.2% over the past year which is pretty healthy. Longer term, a £10,000 investment in this ETF in December 2009 would have given you £16,000 at time of writing.

Top holdings include Persimmon (4%), Hammerson REIT (3.72%), BT (2.97%) and Legal & General with broad diversification from telecoms to real estate and insurance to software.

Best growth

SPDR UK Dividend Artistocrats ETF (LSE:UKDV) offers a 4.5% dividend yield with holdings entirely in UK companies. It’s smaller than IUKD with a fund size of just £88m, but has produced a healthy 18% return over the past 12 months and its ongoing charge is cheaper than IUKD at 0.3%.

Investment banking and life insurers make up the highest proportion of this ETF’s holdings. Its stated aim is to track the UK shares that not only produce the best yields, but also those with the best track record that have consistently raised their dividends over the past decade.

There is some crossover between IUKD and UKDV, but you’ll find overall the allocations are much different even though they have similar aims.

Its chief exposures are to SSE, Legal & General, Jupiter Fund Management, Phoenix and Bovis.

Reliability is key to this investing thesis: only 26 FTSE 100 companies have improved their dividend per share every year for the last 10 years.

Dividends aren’t guaranteed and this year we’ve seen some of the longest streaks of high-yield payouts broken by the likes of Vodafone, Imperial Brands and Centrica. So if you’re a dividend-seeking income investor it makes total sense to spread your risk across a collection of shares in an ETF to give yourself the best chance to get richer.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.