Considering the London Stock Exchange traces its roots back to 1698, it’s not surprising to find it packed with income royalty. Indeed, a handful of investment trusts have increased dividends for over 50 years!

Dividend Aristocrats tend to perform well over long periods. Their established market positions and stable earnings give them a defensive quality, which investors typically value during periods of turbulence.

Therefore, they can provide a resilient backbone to a stocks portfolio. To use a football analogy, I suppose it’s similar to having a sturdy defence. This solid base means the team is unlikely to fold every time it gets put under pressure.

A cherry-picking strategy

Thankfully, we don’t have to start rooting through the dividend track records of hundreds of stocks to compile a list. Some firms have already done that work for us and made specific Dividend Aristocrat exchange-traded funds (ETFs).

A popular one is the SPDR S&P UK Dividend Aristocrats ETF (LSE: UKDV). Here are its top 10 holdings.

At first glance, the list contains some excellent income stocks.

So, should I just invest in this ETF and forget about picking individual stocks?

Looking at its stagnant five-year share price, I’m going to say no.

Granted, there have been the regular dividends paid over this period, but the fund’s yield is only about 4.1% today.

I don’t find that very tempting when I can invest in shares of Legal & General and British American Tobacco individually and aim to double that yield.

Of course, those payouts aren’t guaranteed and, as in history, aristocrat status isn’t permanent.

But I do think a fruitful strategy would be to cherry-pick what I consider to be the best individual Dividend Aristocrats and build an income portfolio around those.

The importance of dividends

Since 1926, dividends have contributed approximately a third of the S&P 500’s total return, with share price appreciation making up the rest.

For the FTSE 100, it’s even more dramatic. According to data from wealth management firm Charles Stanley, putting £1,000 into the blue-chip index 20 years ago would have generated around £2,179 (as of February). But with dividends reinvested, it would be £4,577, more than double.

This points to the power of compounding returns.

Sacrificing yield

Looking at my own portfolio, one high-quality Dividend Aristocrat that stands out is spirits giant Diageo.

The starting yield isn’t the highest at 2.9%, and the firm is on the naughty step with investors after delivering a shock profit warning in November. This concern about a slowdown in sales hasn’t gone away, and may even intensify.

Yet I think its portfolio of premium brands — including Guinness, Smirnoff and Johnnie Walker — will stand the test of time. Meanwhile, the prospective payout is covered almost two times by forecast earnings.

I recently took advantage of share price weakness to buy more shares.

The post The UK stock market is rich with Dividend Aristocrats! appeared first on The Motley Fool UK.

There are some fantastic high-paying dividend stocks in the FTSE 100. However, I’m a fan of exchange traded funds (ETFs).

ETFs are funds that track an index or sector and can be bought and sold like shares through most online brokers. They allow me to invest in multiple companies in a single fund and are usually low-cost. 

My pick

The one I’ve been exploring is SPDR S&P UK Dividend Aristocrats ETF (LSE:UKDV). As the name suggests, this fund tracks the S&P UK High Yield Dividend Aristocrats Index.

This index follows the 40 highest-dividend-yielding UK companies that have either increased or maintained their dividends for at least seven consecutive years. It also focuses on large firms as new entrants to the index must have a market cap of at least $1bn. The businesses also have to meet the index’s liquidity requirements.

One of the main reasons I like ETFs is the diversification they provide. This fund consists of 40 companies across several industry sectors. I believe that having a large number of companies within it provides a high degree of resilience. If any individual firm falters, because the weighting of every company is limited to a maximum of 5%, the overall downside to the ETF is limited. 

Companies in this fund are mostly large blue-chip entities across a variety of sectors such as insurance, mining and pharmaceuticals. Household names include the likes of Legal & General, Rio Tinto and GlaxoSmithKline.

The ongoing charge is a very reasonable 0.3% and in terms of passive income, the current dividend yield is 3.59%, payable biannually.

OK, that’s not a huge yield. I can find some companies within the FTSE 100 paying much bigger dividends at the moment. For example, Evraz, the steel-making and mining company, has a current dividend yield of over 11%. However, for my portfolio, I find holding an ETF a simpler and stress-free approach rather than picking individual shares.

Long-term income

No investment is guaranteed, but I’m looking for a simple, long-term income stream. I think buying and holding this fund might be easier for me over the long run than hunting for individual dividend-paying shares. This ETF rebalances each year as the index updates. This means that companies move in and out of the fund automatically, without any input from me. 

This ETF is by no means perfect. Some of these dividend-paying companies will be successful firms that have strong free cash flows. However, some will feel they have to maintain high yields to keep their investors happy even though the business is not growing. In the long run, not only will the dividends be unsustainable, but the firms could even fail.

Despite this, on balance, I’m happy to consider this dividend-paying ETF as a low maintenance, diversified, passive income stream for my portfolio.

The post Can I simplify my passive income for 2022 with this dividend-paying ETF? appeared first on The Motley Fool UK.

My plan for protecting myself

I believe that high dividend paying shares can be a hedge against inflation. My thinking is simple. These high dividend paying companies tend to be established firms in stable sectors. In times of rising prices, they should be able to increase the prices of their goods or services and maintain or increase their dividends more than the rate of inflation.

For my own portfolio, I’ve always liked ETFs (exchange-traded funds). These are funds that track an index or sector and can be bought and sold like a share through most online brokers. They allow me to invest in multiple companies in a single fund and are usually low cost.

The ETF I’ve been looking recently at is SPDR S&P UK Dividend Aristocrats ETF (LSE:UKDV). This fund tracks the S&P UK High Yield Dividend Aristocrats Index.

This index follows the 40 highest dividend yielding UK firms that have either increased or maintained their dividends for at least seven consecutive years. It also focuses on large businesses since new entrants to the index have to have a market cap of at least $1bn. The companies also have to meet the index’s liquidity requirements.

Companies in this ETF are mostly large blue-chip companies across a variety of sectors such as insurance, mining, and pharmaceuticals. Household names include the likes of Legal & General, Rio Tinto, and GlaxoSmithKline.

The ongoing charge is a very reasonable 0.30%. The current dividend yield is 3.77%

Am I going to invest?

Though it might not appeal to all investors, I like this ETF. It has a high eligibility criterion and is well diversified across sectors.

Although, it’s worth me remembering there are risks. Some of these high dividend paying companies will be established, successful firms that are great at generating free cash flows. However, some will feel they have to maintain high dividends to keep their investors happy when the business is not growing. In the long run, companies like these are unlikely to prosper.

Looking at the performance, the one-year return excluding dividends is about 9% and over five years the fund is down about 9%. However, taking the dividends into account, the fund would have provided me with a decent total return over both time frames.

On balance, given that the UK inflation rate could reach double digits next year, I’m seriously contemplating adding this high dividend paying ETF to my portfolio.

The post Could UK inflation be in double digits next year? I’m trying to protect myself with this dividend paying ETF appeared first on The Motley Fool UK.

Funds, shares, bonds, gold, what’s best? Should you buy FTSE 100 household names like Shell or Tesco? Or plump for lesser-known growth stocks on the FTSE 250?

JISA Einstein

Mums and dads being furloughed — along with no school — has made for some fairly tense home situations. Yes, these truly are strange and difficult times. Furnishing your little ones with a JISA might be the last thing on your mind.

But a JISA can make the most of the greatest invention the world has ever devised. Einstein named it the eighth wonder of the world for good reason. This slice of genius is called compound interest.

We’d all like to make our son or daughter rich. But every good investor should follow Warren Buffett’s number one principle: don’t lose money. Because funds contain far more than a handful of individual shares, they are often less volatile. That means prices don’t tend to swing wildly back and forth. And funds are often just easier to deal with.

JISA Aristocrat

SSGA SPDR ETFs Europe (LSE:UKDV) — better known by the ticker symbol UKDV — holds shares in 41 different FTSE 100 companies that are called ‘dividend aristocrats’. These are the top best-paying dividend shares in the FTSE 100.

Hold shares in this fund and you’ll be paid a 5% dividend into your JISA, twice every year.

Among the top companies held by the UKDV fund are renewable wind farm operator SSE, water utility giant Pennon Group, pharmaceutical company GlaxoSmithKline, and popular financial services company Legal & General.

The fund managers do all the calculations for you, which is good, and will even move certain shares in and out of the fund if they are underperforming.

You’ll pay a small management fee of 0.3% to hold this fund in a JISA. Reinvest your dividends — there’ll be a tickbox option in your JISA settings — and you can buy up more shares in the fund at no extra cost. This is where Einstein’s magic happens. Reinvesting dividends equals compound interest.

Working magic

Each year you can put up to £9,000 into a JISA, tax free. Those last two words are extremely important. It means any capital gains (from share price rises) or dividends (paid out by companies from profits) are entirely free from tax in the JISA.

Family and friends are also allowed to contribute to a JISA, if you want to steer your kids away from birthday presents of soon-discarded Nintendo Switch games or the latest trainers.

You can open a JISA when your child is at any age. Add the maximum each year and in five years’ time you’ll have a very healthy £45,000. But use Einstein’s eighth wonder of the world and my suggestions of a 5% dividend fund, with the dividends reinvested? That £45,000 has just turned into £60,788.

Just imagine what you could do if you leave it till they are 18?

Even at small contributions, the amounts you can add from dividend investing are quite staggering. Say you can only start with £100 a month. Leave it long enough — 18 years would do it — and if the rates remain relatively constant, you’d come away with a JISA worth £31,713.

The post £5k to invest in a JISA? This is the only FTSE 100 fund I’d buy appeared first on The Motley Fool UK.

Record payouts

According to data published in Link Asset Services’ UK Dividend Monitor, the total value of dividends paid by UK companies hit £32.3bn in the third quarter of 2018. That puts the total amount paid by UK companies for the year (including both regular and special payouts) on track to hit £100bn. 

This is the highest level of gross corporate payouts in the UK ever recorded. In 2007 for example, the year before the financial crisis, total corporate payouts totalled just under £60bn.

Some sectors have contributed more to the bonanza than others. Mining companies were the largest payers of dividends in the third quarter, according to the data, with banks and oil companies also putting in strong showings.

Tech stocks produced the largest year-on-year increase in total payouts, with a rise of more than 60%, compared to just 40% for the next closest sector (mining). Retail stocks produced the worst showing. Distributions from the retail sector declined nearly 40% year-on-year.

Riding the trend 

So, how can you profit from this dividend bonanza? Investing in the FTSE 100 is a good place to start. While the figures above are based on dividends paid by companies in the FTSE All-Share Index (representing 98-99% of UK market capitalisation), the FTSE 100 represents around three-quarters of the entire UK market.

Its dividend credentials have also helped the index outperform other UK indexes over the past 12 months. Including dividends, the FTSE 100 has produced a total return of -3.7% over the past year. Meanwhile, the FTSE All-Share is down 4.1%, and the FTSE 250 is off 6.4%.

At the time of writing, the FTSE 100 supports a hefty dividend yield of 4.4%, compared to just 3.2% for the FTSE 250. According to my figures, this is the second highest yield of any index in the world.

Dividend funds 

As well as a simple FTSE 100 tracker, you can also profit from the UK’s dividend bonanza with the iShares UK Dividend UCITS ETF (LSE: IUKD). This ETF is a basket of the 50 highest-yielding stocks from the FTSE 350 Index.

All stocks are picked according to their forecast one-year dividend yields, and then weighted accordingly. Higher-yielding companies make up a proportionately bigger share of the fund’s assets.

This isn’t the most scientific approach to building a dividend portfolio, but it certainly works. With a distribution yield of 6.1%, the ETF offers one of the highest yields in the UK equity income fund space, and it only costs 0.4% per annum.

Another income-focused fund is the SPDR UK Dividend Aristocrats ETF (LSE: UKDV). This ETF doesn’t target yield, instead, it looks for dividend sustainability — companies that have 10 consecutive years of payout growth are only considered.

As a result, the distribution yield is lower than iShares’ offering at 4.4%, but if you prefer quality over quantity, Dividend Aristocrats might be a better buy for your portfolio.

No matter what your preference, there are plenty of different ways to take part in the UK’s dividend windfall. What are you waiting for?

The post FTSE 100 dividends just hit a record: Here’s how I think you can profit from this bonanza appeared first on The Motley Fool UK.

Smart-beta

ETFs offer investors a way to get invested in a diversified portfolio of investments by tracking various market indexes. The vast majority of investors focus on ETFs that seek to replicate the performances of popular stock market indexes such as the FTSE 100 and the S&P 500, but there’s also been a rise in the number of ETFs that track a different kind of index, in which stock weights are not (solely) determined by market capitalisation.

These ETFs are typically known as smart-beta ETFs, and they offer many of the benefits of active management but at substantially lower costs. For such funds, stocks can be weighted by other equity attributes, such as volatility, momentum, value, quality or dividend yield.

Dividend ETFs

For dividend investors, ETFs that focus on stocks with high dividend yields may offer an attractive way to get more exposure to dividend-paying stocks. However, it’s worth bearing in mind that there are quite a few different dividend ETFs on the market today, so finding the best fund for your own needs is very important.

Some dividend ETFs follow very different approaches in selecting dividend stocks for their portfolios, meaning returns between individual dividend ETFs may vary substantially, even if they operate in the same equity space.

With this in mind, I’m taking a closer look at how three different UK dividend ETFs construct their own equity income portfolios.

Yield-weighted

The iShares UK Dividend UCITS ETF (LSE: IUKD) uses one of the simplest approaches to building its portfolio of dividend stocks. It seeks to give investors diversified exposure to high-yielding UK companies, by investing in the 50 highest-yielding stocks from the FTSE 350 Index.

Companies are picked by their forecast one-year dividend yields, giving the ETF a forward-looking aspect. And once 50 constituents have been selected, index weights are calculated by the forecast dividend yields for each stock, such that the higher-yielding companies make up a proportionately bigger share of the fund’s assets.

Criticisms

This approach allows the ETF to regularly earn very high dividend payouts, which in turn enables it to distribute high income returns to its shareholders. As such, the ETF boasts one of the highest yields from the UK equity space, with a distribution yield of 5.2% at the writing

However, this approach has also met its criticisms. Through investing in the top one-seventh of the FTSE 350 Index by yield, and by not screening stocks based on the sustainability of their dividends, the ETF exposes investors to potential dividend traps.

Just because a stock has a high yield, it doesn’t necessarily make it a good dividend stock — as when a high yield looks too good to be true, the risk of a dividend cut can also be very high.

Dividend track records

Meanwhile, the SPDR UK Dividend Aristocrats ETF (LSE: UKDV) seeks to achieve a balance between seeking high-yields and companies that are likely to maintain their dividend payouts.

It only considers companies that have consistently raised or maintained dividend payouts over a period of 10 or more consecutive years. As such, it uses a company’s dividend track record to screen out companies that have not proven themselves as reliable dividend payers.

As expected, there are big differences between the stocks held by the SPDR ETF and the above iShares ETF. iShares’ top two holdings, Inmarsat and Centrica, which each account for more than 3% of its total assets, simply do not feature in the SPDR fund, due to dividend cuts in recent years. There are, of course, many overlaps too, such as SSE and Imperial Brands, which are both listed high up in the two fund’s top holdings.

Fewer holdings

In addition, the SPDR ETF invests only in 30 companies, substantially fewer than the iShares ETF, due to its smaller investible universe and the desire to maintain a high average portfolio yield. But unsurprisingly — and despite its fewer holdings — the SPDR fund still has a considerably lower distribution yield of just 4.2%.

The past performance of the SPDR fund has lagged behind its iShares rival too, with a total return over the past five years of just 27% comparing rather unfavourably to the iShares’ performance of 40% over the same period. That said, due to the fund’s seemingly more defensive stock selection methodology, the SPDR could, quite possibly, outperform its rival in a market downturn.

There is another key advantage of choosing the SPDR fund over the iShares option — that is the cheaper cost structure. SPDR has an ongoing charges figure (OCF) of 0.30%, against iShares’ 0.40%.

Quality screener

My final consideration in the UK equity income space is the BMO MSCI UK Income Leaders UCITS ETF (LSE: ZILK). This fund, which was launched only back in November 2015, uses a fairly innovative method to pick out quality income stocks.

It utilises a two step screening process to pick out stocks based on ‘quality’ fundamental attributes, which include a high return on equity, stable year-on-year earnings growth and low financial leverage. The top 50% of constituents of the MSCI UK Index that score highest on three fundamental attributes are then screened by their dividend yield, to pick out only 25% of the total number of constituents from the MSCI UK Index.

Encouraging performance

It’s still too early to say whether this innovative approach to selecting high-quality dividend stocks is effective over the long run, although the fund’s recent, albeit short-term, performance is encouraging. Since its inception less than three years ago, this BMO fund has delivered a cumulative total return of 21%. The fund is also the top performer of the three dividend ETFs considered here today over the year-to-date, one-year and two-year time periods.

Charges for the BMO fund lie in the middle the two other funds, with an OCF of 0.35%.

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