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Best UK Dividend ETFs to Invest in Now

Dividend ETFs help generate income from investments the easy way. Explore your best options.
Aleksandar Hrubenja
Author: 
Aleksandar Hrubenja
Muze Hasan
Editor: 
Muze Hasan
16 mins
November 10th, 2023
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Investing in dividend-yielding exchange-traded funds can provide a reliable source of passive income. However, selecting the right ETF requires careful consideration of various factors beyond just the dividend yield.

In this article, we will explore what dividend-yielding ETFs are, how they work, and what factors to consider when choosing them. We will also provide insights into investing in dividend ETFs in the UK and the best investment platforms to use.

Best Dividend ETFs At a Glance

Below you can find the best dividend-yielding ETFs available in the UK.

Fund Size

Ongoing Charge/Expense Ratio

Net Asset Value

5-year performance

Avg Yield(12m Trailing)

Frequency of Dividend Payouts

SPDR S&P UK Dividend Aristocrats ETF

£126.99m

0.30%

£10.04

-0.32%

4.63%

Semi-annually

Vanguard FTSE All-World High Dividend Yield UCITS ETF

£3.14bn

0.29%

£47.77

+5.93%

3.88%

Quarterly

WisdomTree UK Equity Income UCITS ETF

£9.65m

0.29%

£4.17

-1.18%

5.96%

Semi-annually

Fidelity Global Quality Income ETF Inc

£324.50m

0.40%

£6.0038

+9.70%

NA

Quarterly

L&G Quality Equity Dividends ESG Exclusions UK UCITS ETF

£38.92m

0.25%

£9.37

+3.65% (one year)

NA

Quarterly

iShares UK Dividend UCITS ETF

£852.69m

0.40%

£6.93

-0.23%

6.26%

Quarterly

1. SPDR S&P UK Dividend Aristocrats Overview

The SPDR S&P UK Dividend Aristocrats UCITS ETF is an investment fund designed to track the performance of the highest dividend-paying companies in the UK.

The term Aristocrat represents the specific investment strategy used by the fund. It indicates that the fund focuses on companies that have a history of consistently increasing the size of their dividends over time.

Furthermore, it follows the S&P UK means that the companies within it are diversified, stable, and overall very profitable.

Top holdings
  • Intermediate Capital Group PLC

  • Legal & General Group PLC

  • National Grid PLC

  • IG Group Holdings PLC

  • Hargreaves Lansdown PLC

2. Vanguard FTSE All-World High Dividend Yield UCITS ETF Overview

The Vanguard FTSE All-World High Dividend Yield UCITS ETF is an investment fund that offers exposure to high dividend-paying stocks across both developed and emerging markets.

This fund tracks companies with high dividend yields, all across the world. By including both developed and arising markets, it guarantees a very high level of diversification.

Vanguard is well-known for its passive investment strategies and commitment to minimizing expenses. By investing in this ETF, investors can gain exposure to a wide range of high-dividend-yield stocks at a relatively low cost.

Top holdings
  • Exxon Mobil Corp

  • Johnson & Johnson

  • JPMorgan Chase & Co

  • Procter & Gamble Co

  • Nestle SA

3. WisdomTree UK Equity Income UCITS ETF Overview

The WisdomTree UK Equity Income UCITS ETF is an investment fund that focuses on providing exposure to UK-based companies with a focus on generating income.

This Index is designed to capture the performance of dividend-paying companies in the United Kingdom. The index methodology includes screening companies based on dividend yield and then weighing them by their cash dividends paid.

This approach attempts to prioritize companies that not only have attractive dividend yields but also exhibit the ability to sustain and grow their dividend payments over time.

Top holdings
  • J Sainsbury PLC

  • Tesco PLC

  • SSE PLC

  • BT Group

  • United Utilities Group PLC

4. Fidelity Global Quality Income ETF Inc Overview

The Fidelity Global Quality Income ETF Inc is an investment fund that aims to provide investors with exposure to global equities while focusing on quality companies that offer attractive dividend income.

This index is focused on large and mid-size companies that operate in developed markets. The focus on quality is a distinguishing feature of the Fidelity Global Quality Income Index. Quality companies are generally characterized by stable earnings, strong balance sheets, and consistent cash flows, which can contribute to their ability to pay dividends to shareholders.

Top holdings
  • Apple Inc

  • Microsoft Corp

  • NVIDIA Corp

  • Procter & Gamble Co

  • Eli Lilly and Co

5. L&G Quality Equity Dividends ESG Exclusions UK UCITS ETF Overview

The L&G Quality Equity Dividends ESG Exclusions UK UCITS ETF is an investment fund that focuses on providing exposure to high-quality dividend-paying companies in the UK market while incorporating environmental, social, and governance (ESG) considerations.

Now, like all the other ETFs on this list, it aims at companies that have high odds of providing investors with a regular and steady stream of passive income. However, its ESG considerations are an important aspect.

This fund can be considered an “ethical” fund, in the sense that it focuses on companies that promote and adhere to human rights, labour rights, and anti-corruption measures. Furthermore, they avoid financing controversial weapons and investments in particular fossil fuels.

Top holdings
  • Intermediate Capital Group PLC

  • Admiral Group PLC

  • BAE Systems PLC

  • National Grid PLC

  • Games Workshop Group PLC

6. iShares UK Dividend UCITS ETF Overview

The iShares UK Dividend UCITS ETF is an investment fund that focuses on providing exposure to dividend-paying companies in the UK market.

Specifically, it tracks the top 50 dividend-yielding stocks in the UK, with a focus on materials and consumer staples.

While July 2020 showed a slump, it recovered by early 2021 and has maintained a steady high in terms of price and growth.

Top holdings
  • Rio Tinto PLC

  • HSBC Holdings PLC

  • British American Tobacco PLC

  • Legal & General Group PLC

  • Vodafone Group PLC

Dividend-Yielding ETFs Explained

To choose the best dividend-yielding ETFs, you need to understand what they are and what you can expect from them.

An ETF, or an exchange-traded fund, is a type of investment fund similar to a mutual fund, that can be traded on a stock exchange. It represents a bundle of assets that is designed to track the performance of a specific index, like a stock or a bond index.

The investors pool their money into a single spot which is then managed by fund managers, who distributes the money across a variety of assets. Every investor owns part of the fund in proportion to the amount of money they have invested.

Now, there are essentially two main reasons people invest in an ETF - as an improved form of savings, or as a (semi) passive source of income.

Dividend-yielding ETFs fall into the latter group, and below you can find out why.

What Is a Dividend Yield?

In the context of stocks and investments, a dividend yield represents the annual dividend income generated by a stock relative to its market price. It is expressed as a percentage and helps investors understand the return they can expect from their investment in the form of dividends.

Dividends themselves are a core part of any good investor's thesaurus. They represent a portion of a company's earnings that are distributed to its shareholders each year. A dividend yield provides investors with an indication of how much income they can potentially earn from owning a particular stock.

Furthermore, dividend yields exist as a way for companies to attract and retain investors who are seeking regular income from their investments. Companies that consistently pay dividends and offer competitive yields can be appealing to income-oriented investors, such as retirees or those seeking steady cash flow from their portfolios.

However, it's important to note that not all companies pay dividends, as some may choose to reinvest their earnings back into the business for growth or other purposes. In such cases, the dividend yield would be zero.

What Is a Good Yield on Your ETF Investment?

This question is too complicated to be answered since there are many moving parts and subjective factors that come into play when you invest in an ETF. Owning high-dividend stock, for example, is not always 100% beneficial.

The average yield of any asset can vary depending on the specifics of the asset being considered. It's not possible to provide an exact average yield as it changes over time due to various market conditions.

However, as a rule of thumb, aiming for a dividend yield of at least 3% to 4% is always a good choice.

A "good" or "bad" yield is subjective and can depend on individual investor preferences, risk tolerance, and investment goals. Generally, a good yield is considered to be above the average yield of comparable ETFs or the overall ETF market.

You always need to consider the context that surrounds an ETF. So, besides looking at its yield, you should also consider:

  • The industry relevant to the ETF

  • Its long-term viability

  • Geopolitical factors that might influence the ETF

  • The actual price and fees associated with the ETF

All of the above factors can negate the value of a high-yield ETF.

Consider the following practical example:

An ETF can have a dividend yield as high as 10%. However, it can still be seen as a bad investment if its cost is too high or if its ongoing charges are too much. Perhaps its performance for the past couple of years has been negative and if it had a spike in performance, then that could be a sign of its improvement, or it can be a simple anomaly. Or, perhaps it's part of a failing industry that negates any long-term viability.

Furthermore, you also need to consider how the yield of an ETF measures up to other similar ETFs. Even if you think its yield is high, perhaps you can get a better deal with a different exchange-traded fund in a different industry. Conversely, if you have your heart set on income investing in, let's say, healthcare, the yields in that sector might be, on average, lower, than the yields of ETFs that track energy-focused indexes.

As a final point, and taking all of the above into account, we do consider the above ETFs as having excellent dividend yields, in proportion to their other benefits.

How Are Dividends Paid On ETFs?

Dividends are paid out to investors through a process known as dividend distribution. Every investor receives dividends in proportion to the money they invested within the fund. The entire process is pretty much the same for any type of dividend-yielding investment fund, ETFs included.

However, we also need to mention that the details vary, depending on the type of fund, your location, and the intermediary you used to invest in the ETF (platform, broker, or financial institution).

ETFs typically hold a portfolio of securities, such as stocks or bonds, that generate income in the form of dividends or interest. The ETF management company collects this income from the underlying assets and distributes it to the ETF shareholders.

Steps included in this process are as listed below:
  • Collection - The ETF management company tracks and collects the dividends or interest payments from the underlying assets held by the ETF. The collected income is then aggregated and calculated on a per-share basis.

  • Declaring the dividend payable date - Also known as dividend distribution date, this represents the day on which the dividends will be paid out to the ETF investors.

  • Dividend pay-out - The details of this step involve a great deal of variation since they depend on the platform, broker, or financial institution. However, it always involves the ETF management company paying out the dividends to the shareholders, most often by depositing the yield directly into the brokerage accounts of the shareholders.

Now, there are two things you need to be aware of at this point.

First, you might be offered to reinvest your earnings right back into the ETF, improving its performance and potential long-term returns.

Second, there is no guarantee when it comes to investing, whether ETF dividends are included or not. There is always a risk, and if the ETF underperforms, you will not get your returns.

Do You Pay Taxes on ETF Dividends?

Laws and regulations vary from country to country. In the UK, however, yes, you do have to pay taxes on ETF dividends, but not all the time.

When it comes to paying taxes on dividends, you need to consider two things:

  • Personal allowance

  • Dividend allowance

You don't have to pay taxes on any income you have generated through dividends if it falls within your yearly Personal Allowance (i.e. the amount of income you earn each year without paying tax).

Currently, the average Personal Allowance in the UK is £12,570. However, it can be larger if you claim Blind Person’s Allowance or Marriage Allowance. Conversely, it's smaller if you have an income larger than £100,000.

Dividend Allowance represents the income you can gain from dividends, unrelated to Personal Allowance, and is not taxed in any way.

Note that it changes from year to year, and currently, for the period of 6 April 2023 to 5 April 2024, the UK Dividend Allowance is at £1,000, per year.

Paying Taxes on ETF Dividends in the UK

The income tax that you need to pay depends on your total yearly income. Consult the table below for more information.

Taxable income

Tax rate

Tax rate on dividends over the allowance

Personal Allowance

Up to £12,570

0%

0%

Basic rate

£12,571 to £50,270

20%

8.75%

Higher rate

£50,271 to £125,140

40%

33.75%

Additional rate

over £125,140

45%

39.35%

How to Choose the Best Dividend-Yielding ETFs?

We have already covered choosing an ETF based on its dividend yield (and why that might not always be the best idea). However, there are several factors you need to consider before making a selection.

What Are Your Long-Term Investment Goals?

You need to be clear on what you want to achieve with your investment goals. Do you want to make more money as soon as possible, or are you willing to wait? Are you happy with only getting dividends in perpetuity, or would you consider waiting and selling your share later on?

Then, you also need to decide whether you want a broad dividend-focused ETF or a specialized one targeting specific sectors, regions, or investment styles.

Compare Key Factors

Next, you need to be mindful of several key traits that are relevant to your ETF. Keep an eye on:

  • Dividend Yield: Look for ETFs with a consistent track record of high dividend yields (but keep our section on “good” dividend yields in mind).

  • Expense Ratio: Consider the annual fees associated with the ETF.

  • Holdings and Sector Allocation: Examine the ETF's holdings to ensure diversification and alignment with your investment objectives.

  • Performance and Dividend History: Review the ETF's historical performance and its ability to generate consistent dividend payments.

  • Liquidity: Ensure that the ETF has sufficient trading volume to allow for easy buying and selling.

  • Provider Reputation: Evaluate the reputation and track record of the ETF provider, the platform you are using, and the fund manager.

  • Tax Efficiency: Some ETFs may have specific tax advantages, such as qualified dividend treatment.

Do Dividend-Yielding ETFs Come at a Higher Cost?

A common worry among “would-be” investors is whether a dividend-yielding ETF comes at a higher cost compared to a similar fund. However, there is simply no direct answer to this question.

It depends, significantly, on the type of fund, your broker, location, the platform you are using, the focus of the fund, its core holdings, fund management, and many other factors.

How to Invest in a Dividend-Yielding ETF in the UK?

Investing in a dividend-yielding ETF in the UK involves several steps which are as follows:

Step 1: Do Your Research
Step 2: Choose the Right Platform
Step 3: Set up an Investment Account
Step 4: Research and Select Specific Dividend-Yielding ETFs
Step 5: Invest and Monitor

Finding the Best Platforms to Invest in Dividend ETFs

Choosing the right platform for your investment is just as important as actually choosing a fund. But, choosing the right one can be a bit tricky.

Good platforms like eToro, Hargreaves Lansdown, and Interactive Investor, usually share a number of investing “green flags” that you should consider. These are listed below:

  • Low fees - All platforms and brokers charge fees. However, good platforms do not overdo it, leaving you enough space to collect your dividends.

  • Variety of investment options - A good platform offers a number of different investment types, like index funds, ETFs, futures, bonds, and stocks.

  • A good reputation - Check for reviews of the platforms through online portals or by speaking in person with their respective users.

  • Extra features - This can mean a number of things, including easier fund tracking, additional educational material, or maybe even special deals, like benefits for your pension plan.

  • User-friendliness - Finally, the best platforms are user-friendly. Setting up an account and making an investment should be easy and quick, the website and platform are supposed to be easy to navigate, and every process must be transparent.

FAQ

Are high-dividend ETFs worth it?
Is it better to invest in dividend ETFs?
How to Get $1,000 a Month in Dividends?

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Contributors

Aleksandar Hrubenja
With a BA in English literature and linguistics, training provided by veteran licensed court interpreters, and direct content management experience, Aleksandar Hrubenja knows what good content looks like. He’s tackled any topic thrown his way, spending the last six years writing articles on finance, cryptocurrency, and digital marketing — just to name a few.
Muze Hasan
Muze Hasan is a technical writer with deep experience writing for the Finance industry for topics including but not limited to stocks, cryptocurrency, mergers, acquisitions, valuation, and insurance. He is also a subject matter expert on Blockchain technology and has designed a plethora of web 3.0 whitepapers and pitch decks. On weekends, you can find him riding his Harley Davidson on the Himalayan mountain range.