DIY Investor Magazine
/
December 2015
51
ETFS FOR INCOME
Years of near-zero interest rates have crushed the
income that can be achieved from traditional sources.
ETFs that deliver good dividend yield could be just
the answer for those looking to take advantage of new
pension freedoms and generate income in retirement.
Some investors buy individual shares for income
believing they can cherry pick but studies have shown
most will fail to beat their benchmark.
Buying a large portfolio of blue chip stocks can be
costly due to multiple trading fees and stamp duty and
is not as diversified as an index tracker; whilst actively
managed income funds deliver diversification, most will
not beat the market and annual management fees may
be steep.
Income investment trusts are popular but often trade at
a premium or a discount to the value of their holdings
which means you might pay over the odds to buy into a
trust, or sell it for less than it’s worth.
ETFS FOR INCOME
A portfolio of well-chosen ETFs that invest in different
categories of income paying shares (or other assets,
like government bonds) may offer the best all-round
income solution. With just a handful of ETFs, you can
build a diverse income portfolio, with less risk and with
low fees you’ll retain more of your income to reinvest or
to spend.
Years of near-zero interest rates have crushed the income that can be achieved from traditional sources.
UNDERSTAND YOUR ETF
ETFs divide between those that reinvest income for
capital growth and those that distribute and even
among ETFs targeted at income seekers there
are choices, so it is important to understand the
methodology of the products you select. Many ETFs
pay a dividend income – including many not specifically
aimed at income seekers such as a FTSE 100 or MSCI
World ETF. Our introduction to global and European
dividend ETFs will help get you started.
DIVIDEND YIELD
Dividend yield is a critical factor in determining an
ETF’s potential for income and relates the income paid
out by an ETF to its share price:
Dividend yield = Annual dividend per share/cost per
share If an ETF pays 75p as a dividend and it costs
1800p to buy, the yield is 75p/1800p = 4.17%
‘Historic yield’ is the dividend paid in the past 12
months and ‘current yield’ a forecast of the next 12
months - historic yield is a good indicator for future
distributions. As prices fluctuate, the absolute annual
distribution provides information about the consistency
of the dividend. When investing for future income, the
current/forecast yield is a key indicator which can only
be a ‘best guess’, rather than the more certain return
from bonds or a fixed-rate cash savings account.
A high dividend yield is not always the best investment,
even for income seekers, if the security of the income
is uncertain, or if it’s too volatile. Remember too
that income is only one component in the potential
gains from shares. A lower yielding ETF might hold
companies that attract investors for reasons other than
income, and so could outperform in total return terms.
Nevertheless, the current dividend yield is a good
starting point for finding interesting ETFs for an income
portfolio. Our top 50 lists of ETFs with the highest
dividend yields will give you an initial overview.
ETFS AT A GLANCE
