Dividends are a type of passive income that increase investment returns. Dividends can be reinvested to grow the overall portfolio or utilised by shareholders to meet lifestyle needs. Here we take a look at ETFs designed for the dividend seeking investor.
Paid to shareholders out of the profits of the company, dividends are one of two types of return a shareholder can receive. The other, capital gains, occurs when shares prices increase. Capital gains are only realised when shares are sold and can disappear if share prices fall.
Diversification and dividends
When seeking a reliable and stable source of income via dividends, it is important to consider diversification. Any one company or industry could have a difficult period that could cause it to have to cut dividends. Other companies or industries may experience particularly favourable conditions that could result in higher than anticipated returns to shareholders.
By holding multiple shares across different industries and sectors investors are less exposed to volatility of returns. This is because the returns on each share are imperfectly correlated. This can be expanded beyond the ASX to international shares and different asset classes.
Many investors use ETFs as a quick and easy way to provide “instant” diversification. ETFs are traded on the ASX like ordinary shares and provide exposure to baskets of underlying securities.
The iShares S&P/ASX Dividend Opportunities ETF (ASX: IHD) provides exposure to 50 ASX-listed stocks that offer high dividend yields while also meeting stability, tradeability, and diversification requirements. The ETF returned 16.47% in the year to 31 October and has a 12-month trailing yield of 6.59%.
Management fees are 0.30% and distributions are made quarterly. Top holdings include Wesfarmers Ltd (ASX: WES) (10.62%), Westpac Banking Corp (ASX: WBC) (10.42%), Commonwealth Bank of Australia (ASX: CBA) (9.88%), Woodside Petroleum Limited (ASX: WPL) (9.84%), Rio Tinto Limited (ASX: RIO) (9.02%), and BHP Group Ltd (ASX: BHP) (8.94%).
The SPDR S&P Global Dividend Fund (ASX: WDIV) seeks to track the performance of the S&P Global Dividend Aristocrats AUD Index. The fund made returns of 15.65% in the year to 31 October and had a dividend yield of 4.79%.
Management fees are 0.5% and distributions are made twice yearly. The ETF held 99 stocks at 31 October. Holdings were spread across Canada (21.96%), United States (21.58%), United Kingdom (14.02%), France (7.29%), Japan (7.14%), and Switzerland (4.40%), amongst others.
Top holdings include Hennes & Mauritz AB-B SHS (2.00%), AT&T Inc (1.66%), Klepierre (1.57%), IGM Financial Inc (1.54%), IG Group Holdings PLC (1.53%), and Compass Minerals International (1.50%).
ETFs provide a quick and easy method of diversifying your portfolio. Reducing the concentration of holdings can reduce the volatility of portfolio returns. These ETFs have been designed to provide a diversified source of dividend returns to investors.
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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.