Passive income is a regular income stream that requires very little effort, and it’s something I’m passionate about searching for. The idea of investments that can earn me hands-off returns while I’m working or sleeping is a tantalising proposition. For my own portfolio, I think that a high dividend-paying FTSE 350 ETF might be the best fit.
A FTSE 350 ETF
I’m looking at iShares FTSE UK Dividend GBP UCTIS ETF (LSE: IUKD). This fund aims to replicate the return in the FTSE UK Dividend + Index by investing in the 50 firms with the highest dividend yields in the FTSE 350.
It has a low expense ratio of 0.40%, good trading volume, and is large in size. Looking at the holdings shows just how well it’s diversified across industry sectors. For example, established, well-known names like HSBC, GlaxoSmithKline, and Vodafone are just a few of the largest holdings.
This investment will pay me a regular dividend at certain intervals throughout the year and there is also the potential of price appreciation.
One of the main risks of a high-yield fund like this is the dividend trap. This is where the dividend isn’t sustainable because the underlying business is not good.
Some 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 underlying business is in difficulty. In the long run, the value of these companies is likely to fall and this could hurt the ETF’s long-term performance.
That said, there’s a 5% cap on any individual holding in the fund. This should provide resilience in case any single company significantly underperforms.
Should I invest?
The current dividend yield is 5.78%, which is paid quarterly. Though it’s less than some of the best dividend payers in the FTSE 350, it’s good enough for my own portfolio. The trade-off is that I’m forgoing some potential return for having the diversity of the fund rather than an individual share.
The fund is also rebalanced on a semi-annual basis as the index updates. In theory, this means that the ETF automatically updates with the companies with the highest returns. Rather than buying and selling shares in individual companies myself, this does it for me.
The price action of iShares FTSE UK Dividend GBP UCTIS ETF is also encouraging. Over 12 months it has climbed by around 20% and year-to-date, it has seen a rise of almost 2%. I’m hoping for a further increase during the remainder of the year, since any further rises in interest rates could see money flowing into dividend-paying stocks like the ones held in this ETF.
Though in investing nothing is certain, I think this is a great investment to buy and hold to earn passive income. Therefore, I’m going to seriously contemplate adding this FTSE 350 ETF to my holdings as part of a balanced portfolio.