Can I simplify my passive income for 2022 with this dividend-paying ETF?

I’m looking at whether this exchange traded fund could be the simplest way for me to earn passive income without having to think about stock-picking in 2022.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Passive income is regular income from an asset, like a stock, that requires little effort or maintenance. I’m constantly on the hunt for hands-off returns and in  2022, I’m once again looking at long-term dividend streams.

There are some fantastic high-paying dividend stocks in the FTSE 100. However, I’m a fan of exchange traded funds (ETFs).

ETFs are funds that track an index or sector and can be bought and sold like shares through most online brokers. They allow me to invest in multiple companies in a single fund and are usually low-cost. 

My pick

The one I’ve been exploring is SPDR S&P UK Dividend Aristocrats ETF (LSE:UKDV). As the name suggests, this fund tracks the S&P UK High Yield Dividend Aristocrats Index.

This index follows the 40 highest-dividend-yielding UK companies that have either increased or maintained their dividends for at least seven consecutive years. It also focuses on large firms as new entrants to the index must have a market cap of at least $1bn. The businesses also have to meet the index’s liquidity requirements.

One of the main reasons I like ETFs is the diversification they provide. This fund consists of 40 companies across several industry sectors. I believe that having a large number of companies within it provides a high degree of resilience. If any individual firm falters, because the weighting of every company is limited to a maximum of 5%, the overall downside to the ETF is limited. 

Companies in this fund are mostly large blue-chip entities across a variety of sectors such as insurance, mining and pharmaceuticals. Household names include the likes of Legal & General, Rio Tinto and GlaxoSmithKline.

The ongoing charge is a very reasonable 0.3% and in terms of passive income, the current dividend yield is 3.59%, payable biannually.

OK, that’s not a huge yield. I can find some companies within the FTSE 100 paying much bigger dividends at the moment. For example, Evraz, the steel-making and mining company, has a current dividend yield of over 11%. However, for my portfolio, I find holding an ETF a simpler and stress-free approach rather than picking individual shares.

Long-term income

No investment is guaranteed, but I’m looking for a simple, long-term income stream. I think buying and holding this fund might be easier for me over the long run than hunting for individual dividend-paying shares. This ETF rebalances each year as the index updates. This means that companies move in and out of the fund automatically, without any input from me. 

This ETF is by no means perfect. Some of these dividend-paying companies will be successful firms that have strong free cash flows. However, some will feel they have to maintain high yields to keep their investors happy even though the business is not growing. In the long run, not only will the dividends be unsustainable, but the firms could even fail.

Despite this, on balance, I’m happy to consider this dividend-paying ETF as a low maintenance, diversified, passive income stream for my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Niki Jerath has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

How I’m trying to make a million from passive income

Invest as much as possible, regularly, and use the passive income to plough back into more shares. Here's how millionaires…

Read more »

Investing Articles

I’d buy 30,434 shares of this UK dividend stock to target £175 a month in passive income

A top insider has spent over £1m buying this 9%-yielding passive income share over the last year. Roland Head explains…

Read more »

Growth Shares

Should I buy Rolls-Royce shares for 2025?

Edward Sheldon’s missed out on the huge gains that Rolls-Royce shares have generated this year. But should he buy the…

Read more »

Investing Articles

30,000 shares in this FTSE 250 REIT could earn me £559 a month in passive income

Real estate investment trusts can be great passive income investments. And Stephen Wright likes one from the FTSE 250 with…

Read more »

Investing Articles

Down 24% and yielding 9.18! Is L&G the best passive income stock on the FTSE?

Harvey Jones is the first to admit that the Legal & General share price has had a poor year. But…

Read more »