Interactive Investor

These are the highest-yielding ETFs – but should you buy them?

You can grow your portfolio’s income with these exchange-traded fund ideas, but bear in mind that high yields can come at the cost of overall growth.

2nd July 2024 09:35

by Sam Benstead from interactive investor

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Dividend distribution represented by coins passing between hands

Exchange-traded funds (ETFs) give investors simple and low-cost access to stock and bond market indices, such as the UK’s FTSE 100 or America’s S&P 500.

They can also be used by fund groups to target certain parts of the stock market, such as shares with low volatility or fast growth, which is known as “factor” investing.

For investors seeking income, ETFs are a useful way of targeting shares that have dividend yields. By selecting the income share class, often marked “dis” for distributing, dividends are paid into your investment account rather than reinvested.

Using data provider Morningstar, we found eights ETFs that yield more than 5%, without using leverage. Another six yield more than 4%. For reference, the FTSE 100 index, which is one of the highest-yielding indices globally due to its concentration in cash-rich resources, tobacco and financial companies, currently yields about 3.8%.

The highest-yielding ETFs use rules to select only high-income shares. Top is Xtrackers Stoxx Global Dividend 100 Swap (XGSD) with a 7.6% yield, according to Morningstar. This ETF, which charges 0.5% in annual fees, only selects the highest-yielding 100 global companies from developed markets. It owns firms ranging from the UK’s HSBC and Legal & General, to miner Yancoal Australia and developer Henderson Land Development.

Also yielding more than 7% is iShares EM Dividend ETF (IEDY), which for a relatively high fee of 0.65% owns the highest-yielding emerging market shares, such as Petroleo Brasileiro (NYSE:PBR), Vedanta and Bank Of China Ltd Class H (SEHK:3988).

Other emerging market ETFs that may be attractive to income seekers are iShares Asia Pacific Dividend ETF (IAPD) and Wisdom Tree Emerging Markets Equity Income (DEMD), which yield 5.4% and 5.1% respectively. These ETFs pick only the highest-yielding shares from their respective markets.

Similarly, iShares UK Dividend ETF (IUKD) selects just 50 highest-yielding UK shares, including HSBC, Imperial Brands, Vodafone and Rio Tinto. The strategy has one-third invested in financials, such as banks and insurance companies. 

While most of the ETFs on the list focus on high dividends exclusively, some own shares that pay reliable and growing dividends. This seeks to avoid the pitfall of owning shares that have fallen a lot in value, likely because the company is struggling – this pushes up the dividend yield, which is calculated by taking the past 12 months of dividends per share and dividing by the share price (and then multiplying by 100). However, a falling share price may suggest that future dividends will be cut. Bear in mind that high yields do not mean market-beating returns from a total return perspective, when both capital and income are combined.

SPDR S&P Emerging Markets Dividend Aristocrats (EDVD) yields 4.4% and owns only emerging market stocks that have increased or maintained dividends for at least five consecutive years.

Xtrackers Euro Stoxx Quality Dividend ETF (DXSA) and Franklin European Quality Divided Ucits ETF (FLXD) yield around 5% and own companies with “high and persistent” dividends in Europe.

Invesco EURO STOXX Hi Div Low VolETF GBP (LSE:EUHD) is another interesting option for investors looking for stable returns. It owns 75 European shares ranked on their 12-month historical dividend yield, and then ranked according to their 12-month historical volatility, starting with the least volatile.

NameTickerGlobal CategoryYield (%)1-yr total return (%)5-yr total return (%)
Xtrackers Stoxx Global Div100 Swp ETF 1DXGSDGlobal Equity Large Cap7.6318.2926.96
iShares EM Dividend ETF USD DistIEDYGlobal Emerging Markets Equity7.3619.72-2.93
Invesco FTSE Em Mkts Hi Div Low Vol ETFEMHDGlobal Emerging Markets Equity5.9911.285.3
iShares Asia Pacific Div ETF USD DistIAPDAsia Equity5.3715.795.64
WisdomTree Europe Equity Income UCIT ETFEEIEEurope Equity Large Cap5.3713.8919.95
iShares UK Dividend ETF GBP DistIUKDUK Equity Large Cap5.2119.4431.01
iShares Euro Dividend ETF EUR DistIDVYEurope Equity Large Cap5.158.69-0.81
WisdomTree Emrgng Mkts Equity Income ETFDEMDGlobal Emerging Markets Equity5.0720.7927.14
Invesco EURO STOXX Hi Div Low VolETFEUHDEurope Equity Large Cap4.941512.82
Franklin European Quality Div UCITS ETFFLXDEurope Equity Large Cap4.7416.0539.66
Xtrackers Euro Stoxx Qual Div ETF 1DDXSAEurope Equity Large Cap4.7214.527.09
SPDR S&P EmMks Dividend Aristocrats ETFEDVDGlobal Emerging Markets Equity4.415.386.94
WisdomTree Europe SmallCap Div UCITS ETFDFEEEurope Equity Mid/Small Cap4.0217.5634.86
SPDR® S&P Global Div Aristocrats ETFGLDVGlobal Equity Large Cap4.0112.9413.58
Source: Morningstar/ FE FundInfo, 25 June 2024

Past performance is not a guide to future performance.

Are high-yielding ETFs worth it?

It is important to understand why yields are high. Dividends yields are a product of the dividend a company pays, but also the share price. So, a high yield could be the result of a struggling industry or sector rather than a healthy company returning lots of cash to shareholders.

For example, total returns, which include capital gains and reinvested dividends over five years, have been disappointing for some of these ETFs. iShares EM Dividend Ucits ETF is roughly flat over five years, as is iShares Euro Dividend Ucits ETF, and iShares Asia Pacific Dividend is up just 7%.

Nevertheless, high dividend yields can help smooth returns for investors, as they are likely to receive a set amount of income per year, which could rise with inflation if companies are making more money.

Strong performers, on a total return basis over five years, are Franklin European Quality Dividend UCITS ETF (up 40% over five years), WisdomTree Europe SmallCap Div UCITS ETF GBP (LSE:DFE) (up 35%) and iShares UK Dividend Ucits ETF (up 32%). These trackers show that high dividends do not always have to come at the cost of poor capital returns.

Alex Watts, investment data analyst at interactive investor, also makes the point that a high yield may not necessarily be sustained. “It is important to not just target the highest-yielding businesses, but rather to look for companies with sufficiently strong balance sheets underlying their distributions, which are capable of sustaining or growing their dividends over time.”

However, Watts also stresses the long-term power of dividend reinvesting. “For equity investors, income can form an important component of total return. A consistent dividend can provide a steady income return (which potentially will grow over time) alongside any capital return from an increase in a company’s share price. Over the long term, stable dividends provide a cushioning effect when markets decline, and can be reinvested to compound an investor’s ultimate total return.” 

Watts favours two lower-yielding ETFs. The first, yielding around 4%, is SPDR® S&P Global Div Aristocrats ETF GBP (LSE:GBDV). It aims to track the performance of high-dividend companies across the globe. However, instead of just seeking the highest-yielding businesses, constituents must have a record of maintaining or growing their dividends over the past 10 consecutive years, while having a positive return on equity and cash flow. Rather than weighting by the company’s size, the constituents are weighted by the size of the dividend, which leads to a markedly different composition to that of a conventional global index.

Watts says: “This dividend-growth focused approach leads to the fund being overweight more typically value-heavy sectors, such as utilities (26.6%), financials (25.6%) and real estate (11%), while being hugely underweight tech (2.4%) and healthcare (3.1%). The portfolio is more heavily skewed in favour of mid-cap companies at around 40% of the portfolio (more than twice that of the conventional MSCI World index).

“While a bias in favour of mid-cap and value has been a headwind throughout 2023 and year-to-date, the broadly more defensive profile proved its worth in 2022. While developed markets declined some 8%, and peers circa 1%, the ETF returned a positive 5% to investors.”

The fund offers plenty of diversification with around 100 holdings. Its yearly charge of 0.45% is, according to Watts, in line with other products in this space.

For a broader and less stylistically differentiated option, Watts cites Vanguard FTSE AllWld HiDivYld ETF USDAcc GBP (LSE:VHYG). It yields just over 3%, and is made up of roughly 1,880 large and mid-cap stocks from the FTSE All-World index, but including only those with higher-than-average dividend yields. The fund excludes companies that are due to not pay a dividend over the coming 12 months, and ranks the remaining companies by their dividend yields.

Watts described the ETF as being “well diversified and with a yearly fee of just 0.29%”, he noted that “it is one of the cheapest options across global equity income ETF peers.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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