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Exchange-traded funds (ETFs) can plug investors straight into a world of enormous passive income. Many of these investment vehicles offer higher dividend yields than shares trading on the FTSE 100 and FTSE 250. They can also offer more reliable payout growth than many blue-chip companies thanks to their diversified approach.
Take the Invesco US High Yield Fallen Angels (LSE:FAHY), iShares EM Dividend (LSE:SEDY), and iShares World Equity High Income (LSE:WINC) funds. Want to know what makes them top funds to consider in an ISA for dividend income?
Bond power
One problem with investing in shares is that dividends are never, ever guaranteed. Invesco US High Yield Fallen Angels takes this problem out of the equation. How? By focusing on generating income from corporate bonds.
This isn’t a completely risk-free strategy, however. And especially as this fund focuses on below-investment-grade bonds that yield greater levels of income. However, the portfolio’s structured in a way as to reduce the risk of default on investor returns.
In total, the ETF holds 71 different bonds, and no single holding makes up more than 5.2% of the fund. This significantly spreads out risk.
Based on a 6.6% dividend yield, an £5,000 investment here could yield a £330 passive income this year.
What about equity funds?
The iShares EM Dividend ETF focuses — as its name implies — on generating income from emerging market shares. More specifically, it holds shares in 100 companies with the highest dividend yields. These range from Brazil and China, to South Africa and the Czech Republic.
The advantage? The fund has the potential to deliver stunning long-term capital growth along with reliable and large dividends. Be mindful, though, that its focus on development markets can lead to greater share price volatility at times.
That said, with exposure to a number of different industries, the likelihood and scale of such volatility is greatly reduced. Holdings include healthcare, telecoms, consumer staples, and real estate companies.
A £5,000 lump sum investment here might provide £255 in dividends this year, reflecting the fund’s current 5.1% yield.
Double-digit dividend yields
iShares World Equity High Income offers the highest dividend yield of these three top funds. It also offers the best diversification, in my view, which can improve an investor’s chances of a reliable income.
Like the iShares EM Dividend ETF, this fund offers exposure to a multitude of industries including information technology, financial services, healthcare, and telecoms. But that’s not all — the 468 dividend payers it holds are located across global stock markets, providing better geographical diversification.
This iShares fund has another trick up its sleeve, too. It also holds cash and US Treasuries. This boosts dividend visibility and reduces the chances of it sinking in value if broader stock markets fall.
Taking into account the ETF’s 10.1% dividend yield, £5,000 invested here could provide a £505 income this year.
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