Wednesday 17 February 2021

London's Equity Income ETFs

The London market includes thousands of Exchange Traded Funds (ETFs). But finding the right ETF for your portfolio is not straightforward. Here are some ideas for equity income ETFs - paying an income from dividends.

As I have discussed before, once you have decided to used ETFs to build your DIY Income Investor portfolio it is not that easy to find the right ones. Investors Chronicle had an excellent article back in 2016 on London's equity income ETFs paying an attractive yield. In this post I'll try to update the article and pull out some of the key observations. 

Equity income exchange ETFs offer a basket of high-yielding stocks for a low ongoing charge. Different ETFs are based on different approaches either stressing high returns or sustainability, based on:
  • High current or forecast dividend: historical yield is the most common measure used when analysing income, but it is worth remembering that yield is directly related to share price and is easily distorted by falling or rising stock prices
  • Good track record of paying dividends 
  • Other indicators of business sustainability, such as payout ratios (to eliminate those with unsustainable dividends)
ETFs focusing on quick returns (i.e. high yield) tend to come with higher volatility, while those with longer time frames reduce risk, but also reduce income (but hopefully maintain capital value).

If you are looking for geographical diversification) you can find equity income ETFs covering:
  • UK
  • Europe
  • US
  • Asia/Pacific
  • Emerging Markets
In addition, some of the ETFs are available in a couple of different currencies. I usually opt for the £ Sterling option, although I'm not sure this make much difference.

As usual, I will only be concentrating on ETF that distribute their dividends: non-distributing ('accumulation') ETFs also exist in many similar forms. 

Note that the yields shown are just a snapshot - they are constantly changing.

Vanguard has only one dividend-focused product available on the London Stock Exchange but this is my favourite income ETF because it has been so consistent. It weights stocks only by forecast dividend yield although it tracks one of the most populated indices, which has over 1,000 stocks. 
  • Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYD) - yield 4.3%

iShares uses a range of dividend strategies in its London-listed ETFs. I hold several iShares ETFs, including the first three here:
  • iShares UK Dividend UCITS ETF (IUKD) - yield 4.1%. It has a narrow strategy focusing only on the 50 stocks with leading dividends in the past year.
  • iShares EURO Dividend ETF(IDVY) - yield 3.6% It provides diversified exposure to the 30 highest-yielding eurozone companies that have passed a number of dividend sustainability screens. 
  • iShares  - iShares Asia Pacific Public Limited Company Dividend UCITS ETF (IAPD) - yield 3.4%
  • iShares MSCI USA Dividend IQ UCITS ETF (QDIV) - yield 2.5%. It applies quality screens and reviews 12-month past performance to omit stocks with potentially deteriorating fundamentals, which could cause them to cut or reduce dividends.

SPDR looks back the furthest of all the ETF providers to find its group of income-paying stocks. They track indices of companies with over 10 or 20 years of dividend increases depending on the region, weighted by dividend yield. As a result these are some of the most concentrated portfolios, but they also have a range of caps and checks to ensure the risk is kept low. These funds tend to come with lower yields than other income ETFs due to their focus on picking long-term payers, which makes them more conservative and defensive. 
  • SPDR S&P Euro Dividend Aristocrats UCITS ETF (EUDI) - yield 3.6%
  • SPDR S&P UK Dividend Aristocrats UCITS ETF (UKDV) - yield 3.3%
  • SPDR S&P Global Dividend Aristocrats UCITS ETF (GLDV) - yield 3.7%
  • SPDR S&P US Dividend Aristocrats ETF (UDVD) - yield 2.4%
  • SPDR S&P Pan Asia Dividend Aristocrats UCITS ETF (ASDV) - yield 2.8%
  • SPDR S&P Emerging Markets Dividend ETF (EDVD) - yield 3.0%

ETF provider Wisdomtree has a dividend focus across its range and also looks backwards but only over one year. Unlike other indices, stocks are not weighted by market capitalisation but by cash dividends paid - to avoid overweighting stocks with tanking share prices. Its ETFs have some of the highest income streams. Stocks are ranked by dividend yield, with the top third from each market making the next stage. 

Their stable of ETFs includes:
  • WisdomTree Europe Equity Income UCITS ETF (EEIE) - yield 4.0%
  • WisdomTree UK Equity Income UCITS ETF (WUKD) - yield 4.4%

db x-trackers equity income ETFs have some of the most concentrated portfolios  taking only the highest-yielding stocks from their chosen regions:
  •  db X-trackers EURO Stoxx Select Dividend 30 UCITS ETF (XD3E) - yield 6.0% (just 30 holdings)  


A provider going even further is Lyxor. Its Quality Income ETFs track the SG European Quality Income Index family, which ranks stocks based on a quality and balance sheet risk score, as well as looking at historic dividend yield. These ETFs have lagged their home indices' total returns but have high yields.
  • X Trackers FTSE 100 Income ETF 1D (XUKX) - yield 6%

Not reported in the article, but Fidelity also has a number of relevant ETFs, including:
  • Fidelity Global Quality Income ETF Inc (FGQD) - yield 2.6%
  • Fidelity US Quality Income ETF Inc (FUSD) - yield 2.3%

Another provider not included in the article - I hold the following:
  • ProShares MSCI Emerging Markets Dividend Growers (EMDV) -  yield 5.7%

DIY Income Investors should be aware that one side-effect of choosing only income-paying stocks is that you tend to end up with a portfolio slanted towards sectors that will underperform in rising markets. Stocks that act like bonds - particularly the consumer discretionary and utility stocks which have paid out dividends for long periods - have been flooded with cash during the consistent period of low interest rates. As a result they are looking expensive, and could fall in value if markets turn and value-style investing comes back into favour.

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.

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