iShares Euro Dividend ETF

My first selection is an exchange-traded fund (ETF), an effective instrument that might help investors diversify their portfolios. The one in question — the iShares Euro Dividend ETF (LSE:IDVY) — offers a 5.7% trailing dividend yield.

At £15.04 per share, it also offers excellent value in terms of earnings. Its corresponding price-to-earnings (P/E) ratio sits at just 8.5 times.

I like the fact the fund’s portfolio is well diversified across different eurozone nations. Around 70% is locked in stocks listed from (in descending order) the Netherlands, France, Germany and Italy. In total, it holds shares in 30 businesses including ABN Amro, ING Group and Bankinter.

On the downside, its sector diversification is narrow, with nine of its 10 largest holdings being financial services companies. This means returns may disappoint in the event of any banking sector (or broader economic) shocks, compared with funds that span more industries.

In total, almost 60% of its the fund is tied up in cyclical financial stocks.

However, this vulnerability may be reflected in the fund’s ultra-low valuation. And investing here exposes me to less risk than putting all my eggs in basket with one or two cheap individual banking shares like Lloyds or Barclays.

Warehouse REIT

Warehouse REIT (LSE:WHR) may be a better choice for more risk-averse investors to consider. As the name suggests, this real estate investment trust (REIT) lets out storage hubs and distribution facilities to businesses.

The advantage here is that the trust’s tenants are tied into long-term contracts, providing a constant stream of income it can distribute to shareholders in the form of dividends.

REITs like this are in fact designed to provide shareholders with a steady stream of passive income. In exchange for certain tax perks, sector rules stipulate they pay at least 90% of annual rental profits through cash rewards.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Such property funds aren’t immune to downturns, however. If a shock is severe enough and revenues dry up, tenants may default on their rents, while occupancy can also drop. And Warehouse REIT has significant exposure to economically-sensitive industries like retail and logistics.

That said, many of the trust’s tenants are financially stable, blue-chip companies like Amazon, John Lewis and Argos, which reduces this danger. It also has hundreds of unique clients which, if one or two encounter difficulties, won’t create waves at group level.

Encouragingly, Warehouse REIT collected an impressive 99.3% of rents it was owed in the 12 months to June, latest financials showed. And its occupancy was a solid 96.4%.

As for the dividend yield, on a 12-month trailing basis this comes in at 7.5%. That’s more than double the FTSE 100 average, which sits way back at around 3.5%.

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The REIT

Real estate investment trusts (REITs) can be great buys for dividend income. In exchange for certain tax breaks, they need to distribute at least 90% of annual rental profits out to shareholders.

Supermarket Income REIT (LSE:SUPR) is one such trust on my radar. Its 12-month trailing yield is a whopping 8.3%. By comparison, the average yield on FTSE 100 shares sits way back at 3.6%.

As the name suggests, this property stock focuses on the food retail sector. This can have multiple advantages for investors. Stable demand for edible goods mean rent collection remains strong across the economic cycle.

Furthermore, Supermarket Income lets its properties to large and financially robust companies like Tesco and Sainsbury. This provides it with added earnings (and thus dividend) visibility.

The company is vulnerable to any interest rate changes, particularly when levels rise. But with UK inflation falling to three-year lows of 1.7%, this threat looks to be less severe in the short-to-medium term at least.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

The ETF

With a 12-month trailing yield of 5.7%, the iShares Euro Dividend UCITS ETF (LSE:IDVY) has recently provided bigger dividends than most UK shares.

The fund is invested in 30 of the highest-yielding companies in the eurozone. To give you a flavour, some of its largest holdings are Dutch bank ABN Amro, Spanish energy supplier Endesa, and French communications giant Orange.

As an investor, this diversification provides significant advantages. It means that the overall return I make isn’t dependent upon one single business, industry, or geography.

This can make it a more secure source of passive income than investing in individual shares. That said, with 58.5% of its capital tied up in financial stocks, dividends could still potentially be in jeopardy during economic downturns.

Still, its huge yield and low price-to-earnings (P/E) ratio makes it an attractive investment in my book. Its earnings multiple is just 8.7 times.

The eurostar

Continuing the continental theme, I think Schroder European Real Estate Investment Trust (LSE:SERE) might be another great dividend buy. The dividend yield here is currently an impressive 7.2%.

This is another REIT, meaning it also must pay the lion’s share of profits out in dividends. With eurozone economic conditions improving and inflation dropping, now could be a good time to consider buying in.

Schroder invests primarily in retail, office, and industrial properties in what it describes as “winning cities and regions“. We’re talking about the likes of Berlin, Paris, and Hamburg — places with high growth, rising populations, strong employment, and good infrastructure. This suggests its properties could be excellent long-term investments.

Returns here could disappoint if eurozone economies experience fresh stress. However, the trust’s exposure to different countries and sectors helps reduce the risk to investors, making it an attractive stock to consider.

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During the three months to June, total assets under management (AUMs) in European ETFs soared past $2trn for the first time. According to Invesco, funds in the region raised $59bn in the second quarter, up a whopping 88% year on year.

ETFs can play an important role in an investor’s portfolio. Indeed, I own several in my own Self-Invested Personal Pension (SIPP). And I think now’s a great time to consider investing in one or two for a healthy passive income.

Attractive investments

These financial instruments carry several big advantages for investors. Firstly, they help investors manage risk by spreading their capital across dozens (or in some cases hundreds) of different asset classes. These can include stocks, bonds, commodities, or even other ETFs.

I can achieve this diversification much more cost effectively than they would by buying lots of separate individual assets. And because ETFs provide exposure to many different asset classes, sectors, and geographic regions, investors can effectively tailor their portfolios according to their objectives and risk tolerance.

On the downside, I may be able to make a greater return by buying individual stocks rather than a basket of assets. However, history shows us that funds still have the potential to deliver huge profits.

Let’s say I put £20,000 in a FTSE 250-tracking ETF back in 1992. Based on an average annual return of 11%, I’d have turned that into £664,940 today.

So which funds would I buy for passive income? Here are two of my favourites.

Euro star

The iShares Euro Dividend UCITS ETF (LSE:IDVY) — which has been going since 2005 — provides exposure to 30 of the highest-yielding companies in the eurozone.

Some of its largest holdings include ABN Amro, ING Groep and Bankinter. In fact, just over half (57%) of the fund’s invested in financial services stocks. As a consequence, it could provide disappointing returns during economic downturns.

Yet the fund’s exceptional value still makes it worth a close look. Its 12-month trailing dividend yield stands at an enormous 6%. It also trades on a price-to-earnings (P/E) ratio of 8.4 times, while its price-to-book (P/B) ratio is 0.9.

A reading below 1 indicates that the fund’s trading at a discount to the value of the assets in its portfolio.

Cool Britannia

It’s a bit of a mouthful. But the L&G Quality Equity Dividends ESG Exclusions UK UCITS ETF (LSE:LDUK) also looks like it could be a great source of dividend income.

With 100% of its money locked into British equities, the fund holds some of the FTSE 100 and FTSE 250’s biggest names including Lloyds, BAE Systems and Games Workshop. Today, its trailing dividend yield is 4.6%, more than a percentage point higher than the Footsie average.

Its portfolio currently holds 41 different shares, which — like the other fund I describe — provides decent diversification. And its ongoing annual charge of 0.25% is one of the lowest in the business.

The fund might be vulnerable to a UK-specific economic downturn. But, on balance, I think it could still prove a top fund to consider for investors seeking exposure to London stocks.

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