Dividend seeker

As a reminder, an ETF is a type of pooled investment security, and it can be traded on the stock exchange like a normal stock. It tracks a particular index, sector, commodity, or other assets.

The iShares UK Dividend ETF tracks the FTSE UK Dividend+ Index. It holds the top 50 yielding dividend stocks from the FTSE 350, excluding investment trusts. Using specific criteria, it works out which companies to include. One of the primary criteria for iShares is the dividend performance of a company.

As the iShares UK Dividend ETF trades like a normal stock, it has a share price too. Currently, the shares are trading for 628p. At this time last year, the ETF was trading for 717p, which is a 12% drop over a 12-month period.

To buy or not to buy

So let’s take a look at some pros and cons of me buying the iShares UK Dividend ETF shares for my holdings.

FOR: the ETF is managed by Blackrock, which is one of the largest asset managers in the world. It has a reputation for operating with higher liquidity than other asset managers, which I like. In addition to this, I am buoyed by the fact that the ETF has good diversification. Of the 50 companies making up the fund, there are lots of different types of companies that operate in different sectors. This can offer protection against headwinds and volatility, like now.

AGAINST: As with any passive income stock, it is always worth remembering that dividends are never guaranteed. They can be cancelled at any time to help conserve cash. This usually happens during times of volatility, or an unexpected event like a pandemic.

FOR: the ETF’s current dividend yield is extremely enticing. It stands at 7.2%. This is considerably higher than the FTSE 100 average of 3%-4%.

AGAINST: A few other risks to consider are lack of geographical diversification, as well as a heavy exposure to financial stocks. All the stocks in the fund are businesses based in the UK. This means a lot of them are at the mercy of the UK economy, which is experiencing lots of issues such as soaring inflation. As for financial stocks, due to recent headwinds, many of them have suffered. This could hurt the ETF’s level of return moving forward but this is something I will keep an eye on.

A passive income stock I would buy

To summarise, there are clear benefits, and some pitfalls, to buying the iShares UK Dividend ETF for my holdings. Current economic issues will impact it in some form, in my opinion. Despite this, I like the look of this ETF to boost my passive income. Its generally diverse portfolio, as well as the dividend yield on offer are big positives for me. I would add the iShares UK Dividend ETF to my holdings.

Benefits

The fund has a 12-month trailing yield of 6.41%, which is above the current FTSE 100 yield of 3.67%. The fund pays dividends on a quarterly basis, which is ideal during retirement. As the fund invests in 50 different companies, it provides better portfolio diversification than investing in a single 6%+ dividend stock.

The fund is managed by BlackRock, which is one of the largest asset managers in the world. BlackRock is known for providing better liquidity than other asset managers due to higher trading volume in its ETFs. This ensures that I am able to cash out more easily during stress or at retirement.

The top 10 largest holdings in the fund include popular FTSE 100 stocks such as the tobacco company Imperial Brands or the asset manager Legal & General. The full list of holdings is available on the BlackRock website.

In the current inflationary environment, I believe that dividend shares remain the best hedge against inflation. Inflation can lead to higher profits and dividends if companies are able to protect their margins by passing on costs to consumers through price rises.

As the rate-hiking cycles continue globally, I believe investors will search for value and short growth stocks. High-yielding stocks are great sources of value during inflationary periods; hence the fund could benefit from capital appreciation.

Risks

Firstly, the fund is particularly exposed to ‘Financials’ and ‘Consumer Staples’, which represent nearly 50% of the fund’s market value. The Consumer Staples category refers to essential products used by consumers, which includes alcohol and tobacco.

The top two holdings of the fund are Imperial Brands and British American Tobacco. From an ESG point of view, the fund might not be the best investment for all investors.

Secondly, the fund is 100% invested in the UK, which provides no geographical diversification. As the UK is forecasted to go in recession later this year, it is important to be aware of the macroeconomic risks faced by the UK.

Conclusion

Overall, UK iShares Dividend UCITS ETF offers an above-average dividend yield and strong portfolio diversification. The fund is a great way for me to generate passive income during retirement.

For me, my dream was to retire early and spend time doing what I love, not just what pays the bills. And it was only through creating enough passive income that I was able to do so.

But, it can be tricky to find the right investments for my portfolio. These are two of my favourites that both play their part in letting me live my life how I choose to.

A growing dividend stable earner

City of London Investment Group (LSE: CLIG) have long been one of my favourite shares that I hold. I first bought this back in 2013 and every year since it’s paid out a chunky dividend. In fact, it’s grown by 9% on average since it started paying a dividend in 2007.

At the moment, it’s still trading down about 15% year to date, giving a historic-based dividend yield of around 7.8%.

If I didn’t already own plenty of these shares in my portfolio, I’d be happy to top up again.

A passive income diversified ETF

Next up, one of my favourite footsie-based ETFs, the not-so-catchily named iShares UK Dividend UCITS ETF (LSE: IUKD).

When I’m looking to live off my passive income portfolio, stability is good. And one way for me to achieve that is through this ETF. That’s because it invests in the top 50 individual high-yielding shares in the FTSE 350 after some basic screening.

If one company runs into issues and decides to cut their dividend, the average dividend yield will fall slightly. That’s much more manageable for me in terms of cash-flow than suddenly receiving nothing.

True, it comes with a slight cost for that benefit, but at 0.4% I think it’s reasonable for what I get.

Currently, it’s returning a potential dividend of around 6%, which I consider pretty good for something with those diversification upsides.

Again, it’s another I’d be happy to add to if I didn’t already own enough for my portfolio.

Playing the long game

At this point, you may be wondering if I’ve simply cherry-picked the passive income investments that have worked out best for me to make this article sound good.

The truth is, no, I own others that worked out better. And there are also those that turned out worse. The honest answer is that not all shares will work out — and that’s okay.

Because that’s why owning a diversified portfolio and holding onto it over the long term was the number one most important thing I did.

It was fundamental for growing my wealth in the first place. And then for turning that wealth into a passive income portfolio I now live off.

After all, I’m all about putting your money where your mouth is. And these tips helped me do exactly that.

Now I could keep it simple and very safe by investing in the latest best-paying savings account. At the time of writing this, that would be Chase’s new 1.5% offering. That’s better than what’s been available for a while. But it’s not going to keep pace with current inflation levels by any stretch.

And that’s the big problem for passive-income investors such as myself. How do I inflation-proof my income without chasing higher-yielding investment products? Can I simply buy up all those tempting individual shares with +10% yields?!

Sadly, it’s one of those inconvenient truths that any increase in return carries extra risk. And that risk is harder to handle when you are already retired. Dividend cuts and share-price crashes are tougher to wait out when you are relying on the income. So, what to do? Well, for me, the answer has always been diversification.

My simple way to diversify passive income from UK dividends

Enter the iShares UK Dividend UCITS ETF (LSE: IUKD). This exchange-traded fund looks to replicate the, perhaps lesser-known, FTSE UK Dividend+ Index. It does this by holding the top 50 individual high-yielding dividend stocks from the FTSE 350, excluding investment trusts.

The index works out which companies to include by applying a few screening criteria. Some are simple, like a stocks’ trading liquidity. But the main one (unsurprisingly) ranks company dividend performance – both for the previous year, as well as those forecast for next.

This happens twice a year and those companies that make the cut are then weighted with respect to this dividend performance factor and their market capitalisation, subject to an overall 5% cap. It’s not perfect by any stretch but it’s not something I get any choice about.

You will no doubt recognise many of the familiar names that end up featuring prominently in this ETF. In top spot is Rio Tinto, closely followed by the two big tobacco companies, British American Tobacco and Imperial Brands, for example. Overall, there are a lot of value-based and consumer essential types – which should hold up well long-term.

But what matters is the resultant dividend yield for my passive income purpose. And sitting at ~5.5% currently, this quarterly dividend stacks up well. Especially for something with protection against single dividend cuts through its diversification.

Now as ever, there’s no such thing as a free lunch and, like all other ETFs, there’s a charge associated with this investment, albeit a relatively low one of 0.4% annually. When I consider the work involved, and the individual trading costs I’d incur, to create the same thing, it seems reasonable to me.

My main concern with this ETF is its UK focus. I really prefer to diversify globally, so I’ll need to keep my investment in proportion from my overall portfolio perspective.

Overall, for me, the benefit of having this diversified passive income easily outweighs the small cost – and I shall sleep easier for it!

There are three benefits to this kind of investment. First, an ETF allows me to invest in multiple companies by just holding one share. Second, it pays me a regular dividend at certain intervals throughout the year. Third, there’s also the potential for price appreciation of the fund.

My passive income ETF pick

The dividend-paying ETF I’m looking at is one I’ve studied before, iShares FTSE UK Dividend GBP UCTIS ETF (LSE: IUKD). This fund aims to replicate the return of 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 0.4%, good trading volume, and is large. Looking at the firms included shows just how well it’s diversified across industry sectors. For example, established well-known companies like Rio Tinto, National Grid, and Vodafone are just a few of the largest holdings.

One of the main risks in a high-yield fund like this is the dividend trap. Some of these high-paying companies will be mature businesses 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 company itself is not growing. In the long run, such companies could falter.

That said, there’s a 5% cap on any individual holding in the fund, which should provide resilience in case any individual company significantly underperforms. 

Long-term income stream

This ETF’s performance has been good, gaining around 20% over the last 12 months and around 5% year-to-date. Despite recent market wobbles, I’m still optimistic about the 2022 outlook for the UK stock market and it wouldn’t surprise me if this fund continues to gain.

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 100, it’s good enough for my own portfolio. The trade-off is that I’m giving up the chance of higher returns from individual stocks for the benefit of owning multiple companies through a single share.

No investment is guaranteed, but I’m looking for a simple, long-term, passive 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.

Therefore, on balance, this passive income ETF is an investment I’d be comfortable keeping for years. I would be happy to consider this for my own holdings as part of a balanced portfolio.

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.

• A high-dividend-paying ETF can be a source of passive income
• Individual shares can give a higher return, but not all high-yielding companies will be winners
• This kind of fund might offer me some downside protection

Passive income means a regular income stream that requires very little effort. In this respect, it’s sometimes referred to as ‘making your money work for you’.

The internet is full to the brim with suggestions for how to achieve this. However, one idea that interests me for my portfolio is a high dividend-yield exchange traded fund (ETF). This is a fund that tracks an index or sector and can be bought and sold like a stock through most online brokers.

The idea is simple, this kind of investment should pay me a regular dividend at certain intervals throughout the year. Then there’s also the potential price appreciation of the fund. 

What I’m considering

The ETF I’m looking at for 2022, is one I’ve studied before, 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 0.4%, good trading volume and is large. Looking at the companies included shows just how well it’s diversified across industry sectors. For example, established big names like HSBC, GlaxoSmithKline and Vodafone are just a few of the largest holdings.

One of the main risks in a high-yield fund like this is the dividend trap. Some of these high-paying companies will be mature businesses 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 company itself is not growing. In the long run, such companies could falter.

That said, there’s a 5% cap on any individual holding in the fund, this should provide resilience in case any individual company significantly underperforms. It’s exactly this kind of robustness that makes me like ETFs as investments.

Should I invest?

Looking at the performance, the fund gained around 18% over the last 12 months and around 3% year-to-date. I’m generally bullish on the 2022 outlook for the UK market and though nothing is certain in investing, it wouldn’t surprise me if this fund continues to gain.

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 100, it’s good enough for my own portfolio. The trade-off is that I’m giving up the chance of higher returns from individual stocks for the benefit of owning multiple companies through a single 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.

In my mind, this really is a hands-off investment. Therefore, I’m going to seriously contemplate adding it to my holdings as part of a balanced portfolio.

Despite this uncertainty, for my portfolio, I still want to be in equities as there are few alternatives that can help me earn a decent return.

High-dividend shares as protection

I’m looking for an investment that pays a good dividend yield. Not only will I enjoy a passive income from the dividend streams, but I hope to benefit from resilience in case of a market sell-off.

I believe that high-dividend-paying shares should offer some good protection in case of a stock market crash. In many cases, stocks with a high dividend yield could be less volatile than other stocks. Investors may hold on to them for the income stream instead of selling when the market declines.

The ETF

I could pick individual shares, but for my portfolio, I’ve always preferred 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 via a single fund and are usually low-cost.

The one I’m considering is iShares FTSE UK Dividend UCTIS ETF (LSE: IUKD). This ETF aims to replicate the return of the FTSE UK Dividend + Index by investing in the 50 companies with the highest dividend yields in the FTSE 350.

It has a low expense ratio of 0.4%, a good trading volume and it’s one of the largest ETFs in this category.

The dividend yield is attractive at 5.76% and diversification is good.

The fund is comprised of 50 companies across several industry sectors, which should provide resilience in case any individual firm falters. A 5% size cap reduces the risk of any single company being overweight in the fund.

Is there a downside?

Despite the positives, I’m aware of the risks. One risk in particular, is the dividend trap. This is where the dividend is just not 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. This could hurt the ETF’s long-term performance.

However, if there’s going to be a stock market crash then I believe diversification is going to be important to my portfolio. A dividend-paying exchange traded fund like this may be a good addition to my holdings and I’m going to seriously consider it.

The thinking

An ETF is a fund that tracks an index or sector and can be bought and sold like a share through most online brokers.

The thinking goes that if I can find a well-diversified, low-cost ETF paying a healthy dividend then this could truly be a way for me to earn some passive income. Passive income can be thought of as regular income from an asset, like a share, that requires little effort or maintenance.

Selection

In this case I am looking for an ETF that will provide long-term dividend streams. There are a few options in this space but I was instantly drawn to iShares FTSE UK Dividend GBP UCTIS ETF (LSE: IUKD). This ETF aims to replicate the return in the FTSE UK Dividend + Index by investing in the 50 companies with the highest dividend yields in the FTSE 350.

There are a number of reasons for me to go straight to this ETF, including its low expense ratio at 0.40% good trading volume and its size as one of the largest ETFs in this category.

Diversification is good. The fund is comprised of 50 companies across several industry sectors, which should provide resilience in case any individual company falters. This is reinforced by a 5% cap on any individual company in the fund, helping to reduce the risk further.

That’s even before we come to the current dividend yield, which is a whopping 5.76%.                                                           

There are risks of course. Some of these high-dividend-paying companies will be mature, successful businesses 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 company is not growing. In the long run, companies like these are unlikely to be successful.

Performance

At the outset, the long-term performance does not look good and over five years the share price has fallen about 15%.

Firms that are in this ETF and can pay good dividends tend to be more established companies in traditional sectors. For a few years now, money has tended to move out of these into high-growth sectors like technology.

However, that performance excludes the dividends, which when included shows that a five-year investment into this ETF would have made a healthy total return.

Conclusion

That leads me back to the beginning. Is this ETF one of the easiest ways to earn passive income right now? For my portfolio, I believe it probably is, but I am not going to invest. Yet.

For me, I am in the prime of my working life and (hopefully) have many more years of working ahead of me. In this case, I am leaning towards forgoing the passive income stream in favour of focusing on high-growth companies in high growth sectors. However, as I approach retirement, I will definitely look at this ETF further!

The joy of dividends

As a value investor for over 35 years, I have come to love my dividends. For me, they are the closest thing to free money that I’ve ever had. Of course, I’m not the first investor to appreciate them. American business tycoon John D. Rockefeller once remarked, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

Investment guru Benjamin Graham, the father of value investing and mentor to US billionaire Warren Buffett, was also a big fan. In his 1949 book The Intelligent Investor, Graham said, “The true investor…will do better if he forgets about the stock market and pays attention to his dividend returns and to the operation results of his companies.” Therefore, Graham counsels investors to ignore share prices and concentrate on underlying company performance and cash payments.

How to grab this cash

In order to earn dividends, one must first be a shareholder. So that means buying shares and holding them until the next pay-out has been accrued. Two dates are important in this process. The first is the ex-div date, the day on which one is no longer entitled to the coming dividend. Thus, buy on this date and you don’t get the next pay-out. Buy the day before and you do. The second is the payment date, which comes generally between two weeks and two months after the ex-div date.

Currently, there are almost 2,000 companies listed on the main market of the London Stock Exchange (the LSE). This number has declined for years (it was close to 2,500 in 2015). However, most of these LSE-listed businesses do not pay out cash to shareholders. Some are loss-making and cannot fund shareholder pay-outs. Others reinvest their profits to generate future growth.

Building a passive income

One way to start building a regular passive income is to buy the shares of dividend-paying businesses. But the distribution of UK company dividends is highly concentrated. According to investment group A J Bell, just 10 FTSE 100 stocks accounted for over half (54%) of 2020’s dividends. Likewise, A J Bell estimates that the top 20 payers account for three-quarters (75%) of 2020’s dividends.

Finally, if you don’t have the time, patience or experience to pick your own company dividends, then the iShares UK Dividend UCITS ETF (LSE: IUKD) can do it for you. This exchange-traded fund owns shares in 50 of the biggest dividend payers from the FTSE 350 index. Its top 10 holdings are all huge, well-known firms. I owned this stock until the global financial crisis of 2007-09. Today, I’ve added it to my buy watchlist as another contender to boost my family’s dividends!