Dividend exchanged-traded funds (ETFs) are a type of fund that lets you invest in a basket of stocks that aim to pay a regular income. Find out how they work, and what the best-performing dividend ETFs in the UK are.
Dividends are an excellent way for investors to make money as shareholders. However, not everyone is comfortable researching and picking individual stocks to invest in.
Investing in dividend exchange-traded funds (ETFs) provides an alternative. It can be a simple, diverse and cheap way to make the most of dividend-paying stocks and compound growth with the headache of managing your own stock portfolio.
The dividends paid out by the ETF can either be rolled up to buy more shares in the ETF or paid out as a income. Dividend ETFs are passively managed, which means they can be quite cheap to invest in as they don’t need much expert oversight.
Best dividend ETFs in the UK
Here are some of the best-performing UK dividend ETFs and the ETFs with the highest dividend yields in the UK, according to JustETF.
Best UK dividend ETFs
Note: We’ve added a link next to each of these funds, which takes you to a share trading app where you can sign up to buy shares in each ETF.
Table: sorted by 1-year performance based on data from JustETF.com to 6 August 2024
ETF
Icon
Dividend yield
1-year performance (to Aug. ’24)
Link to invest
L&G Quality Equity Dividends ESG Exclusions UK UCITS ETF (LDUK)
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
How does a dividend ETF work?
A dividend ETF will track the performance of popular dividend indices. There will be subtle differences between the way these indices work. Some target companies with the highest dividend yields, while others screen for consistency and longevity of payments.
And others focus on companies that have seen the strongest growth in dividends over time. These indices may be weighted by market capitalisation or by the level of dividend and may focus on individual countries or sectors.
How to choose a dividend ETF
The right dividend ETF for you will depend on your personal investment goals, including whether you need an income from your investments today, the level of income you need and whether you want to prioritise a high or growing income.
Here are the main considerations when buying a dividend ETF:
The dividend yield. This is how much the ETF pays out in dividends, relative to its share price. This can only ever be a historic measure, but should give you an indication of the level of income you can expect.
Historic returns. You can look back on how a fund has performed over 1, 3 or 5 years. While this is not a guide to future returns, it should demonstrate how the fund’s strategy has performed relative to its peers and the type of market environment in which it thrives.
Expense ratio. Costs can cause a drag on your fund returns. Dividend ETFs tend to be slightly more expensive than standard ETFs, but 0.4–0.6% is standard. Any higher and you could get an actively managed fund for the same price.
Investing strategy. Does the fund invest in small or larger stocks? Does it invest in a single region or across the globe? Does it invest in specific sectors? It can be worth looking at the top 10 holdings in the fund to see if these are the type of stocks you want in your portfolio.
Risk. In general, dividend-paying stocks tend to be more mature businesses and therefore are “safer” than other areas. However, there will still be a difference between a strategy targeting, for example, small and mid cap stocks versus larger stocks or specific sectors. It is important to be comfortable with the risk you are taking.
At a time when prices are rising, investors need to ensure income rises ahead of inflation. Targeting dividend-paying companies can deliver a high and growing income at a time when other sources of income, such as bonds, look anaemic. This is an important tool in protecting your portfolio against higher inflation, as well as harnessing a stable income stream.
Example: SPDR S&P Global Dividend Aristocrats UCITS ETF
The SPDR S&P Global Dividend Aristocrats UCITS ETF is one of the most popular dividend ETFs. It’s roughly $1 billion in size (about £777 million), it targets long-term and sustainable dividend growth.
To compile the index, S&P isolates the top 100 stocks from the S&P Global Broad Market Index (BMI) with at least 10 consecutive years of a clear dividend policy with rising or stable dividend payments. These stocks may be found anywhere in the world, across developed and emerging markets.
The stocks in the index are weighted by their dividend yield, with no individual stock forming more than 3% of the portfolio. There are also sector and country limits to ensure that there isn’t excessive focus on specific areas.
Its largest weighting is in the US with Highwoods Properties, LTC Properties and Verizon among its top 10 holdings. Its current dividend yield is around 4% (as of July 2024).
Our expert says: What’s the best type of dividend ETF to use?
"This is going depend largely on the rest of your investing strategy. If you’re looking for a starting point, it can be worth using a broad market dividend ETF that covers global markets or an established developed region like the US or the UK. This way you can get started investing and continue to research other dividend ETFs which best suit your long-term goals.
Another option to consider is that you can earn relatively stable dividends by investing in a fund that tracks the FTSE 100. This index is made up of the biggest 100 companies in the UK and many are blue-chip stocks that pay dividends. So, you can invest in the biggest UK companies and earn dividends by using a low-cost ETF that tracks the index. The key is to just get started with an investment you’re comfortable with that provides a simple approach and you can always evolve your dividend ETF strategy over time."
If you choose an accumulation strategy, it will be used to buy more shares in the ETF. This can be a good way to harness the power of compounding and grow an investment over time. But, whether you roll dividends back into the fund or get the income paid out as cash, you may have to pay tax on any dividends over your yearly tax-free allowance.
You may also see capital appreciation of the dividend stocks
Plenty of cheap, passive options
Cons
Dividend payments are not guaranteed
You may see less growth compared to other ETFs
Tax implications if not held in an ISA
Bottom line
Dividend ETFs can be a cheap and straightforward way to target income-paying companies. This can help you build a growing passive income from your investments that should protect you against inflation.
It’s worth noting that income-paying companies tend to be larger, mature businesses and tend to have a higher weighting in industries such as oil and gas or tobacco. As such, they may not score as strongly on environmental, social or governance criteria. It’s also important to remember that dividend payments are not guaranteed and depend on the underlying performance of the stock and any profit generated.
Frequently asked questions
The highest dividend-paying ETFs will fluctuate regularly because dividend yields will be impacted by share price movements so it's always worth researching for the latest figures. However, it is worth noting that yields may be high because share prices are low. It can be a sign that the market doesn't believe that the investment can perform. Investors should approach the highest-yielding ETFs with some caution.
Dividends have been an important component of total returns for investors. Dividend ETFs are a way to secure a long-term inflation-adjusted income from a diversified portfolio of shares. They can often be cheaper than an active fund. When chosen with care, dividend ETFs can be a good option for income-hungry investors.
To understand whether an ETF pays dividends, you need to look at the historic yield. While this only shows the level of income paid out in the past, it is a reliable guide to the portfolio strategy and whether it is likely to pay dividends in future. You can also look at the objectives of an ETF to see whether it targets an income.
Some ETFs pay dividends monthly, but most pay quarterly or every 6 months. If you need an income each month, you will need to find ETFs that explicitly target monthly payments. These are offered by many of the major providers, including State Street Global Advisors, Vanguard and BlackRock.
Based on performance over the last 5 years, iShares UK Dividend UCITS ETF is the best UK dividend ETF.
There are many categories of dividend ETFs: the funds may take a global approach or they may target dividend-paying companies in different regions. Other types of dividend ETFs will focus on sectors that offer high yields, such as real estate (REITs).
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
George is a deputy editor at Finder. He has previously written for The Motley Fool UK, Nasdaq, Freetrade, Investing in the Web, MoneyMagpie, Online Mortgage Advisor, Wealth, and Compare Forex Brokers. He's focused on making personal finance and investing engaging for everyone. To do this he draws from previous work and his Level 4 Diploma for Financial Advisers (DipFA), sharing what he’s learnt. When he’s not geeking out about money, you’ll find him playing sports and staying active. See full bio
George's expertise
George has written 191 Finder guides across topics including:
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