Saturday 7 March 2015

Me, Britain and Dividends (Portfolio Buy)

Following my long-term strategy of 'automating' the DIY Income Investor portfolio I have been buying some more ETF (Exchange Traded Fund) shares.

As regular readers will be aware, ETFs are collective, diversified investment funds that (usually) follow a specific index more-or-less mechanically; this means that they are diversified and (generally) low-cost. In keeping with the main theme of the portfolio, I specialise in ETFs that produce income - from dividends or from fixed-income securities. In addition, it is possible to invest globally with ETFs that are quoted on my 'home; market (the LSE); by contrast it is a lot more complicated to do that with individual securities on different markets.

The latest purchase takes the ETF share of the portfolio to over 40%.

The downside with ETFs is that you are (probably) not going to make a fortune investing in them - they are more relevant to maintaining net worth, rather than creating it. To make money, I still dabble in individual stocks and shares (like Tullett Prebon, TLPR, my remaining tranche of which seems to be coming good - finally!)

I try to take a global view with ETFs - this is one of their key advantages - and as well as having a broad 50/50 split between dividends and fixed-income I can diversify between the UK, Euroland, Emerging Markets, Asia Pacific and the US.

I chose where to buy based on the current yields; the highest I am aware of (it is not easy to keep track of them) are currently, according to Bloomberg:
  • SEML (Emerging Markets fixed-income): 5.9%
  • IAPD (Asia Pacific dividends): 5.4%

ETFs are usually for the long term, although I sometimes sell them, if the yield goes down significantly (usually meaning that there is a capital gain for the taking). This is why I didn't have any IUKD: in June 2014, their yield had fallen below 4% - so I sold up.  However, IUKD or iShares' FTSE UK Dividend Plus is the 'classic' UK dividend share ETF; it invests in physical index securities and offers exposure to the 50 highest yielding UK stocks within the universe of the FTSE 350 Index, excluding investment trusts. It is almost the ideal holding for this kind of income-oriented portfolio.

Nevertheless, IUKD has its critics: primarily for being too crudely based on yield in the choice of constituent companies, while neglecting other key fundamentals. In other words, there is less emphasis on the sustainability of the dividends, although iShares seems to have tinkered a little with the model. What is clear is that this ETF was hammered during the 2007/8 crash, which saw many big-name dividend payers reducing or cutting their payments.

So, not holding a representative UK dividend ETF seemed like a gap in the portfolio. The IUKD yield is currently around 4.4% - not compellingly attractive. There are other brands of ETF following UK dividend shares - but none with as high a yield; there is probably a reason for this, as the IUKD methodology is fairly crude (and has historically been shown to be more risky).

So, I compromised on yield to bring back an old favourite: I, the UK and Dividends

[Purchase price: £9.696]

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. Just wondering, have you ever considered investing in the ITs (investment trusts)? They are perhaps not high yield enough for you?


  2. With the FTSE near all time high and ,as you say the yield at 4.4% is not compelling, the risk to capital is high.