Expert tips on ETFs and mutual funds

Experienced investors can build their own portfolio of dividend-paying global stocks, but Tom Anderson of Killik & Co says this is too risky for most.

He suggests spreading your risk through a mutual fund or ETF and tips Fidelity Global Dividend, which targets companies with predictable cash flows and sustainable dividends. It currently yields

2.93 per cent with a total return of 69 per cent over the last five years, according to Trustnet.com.

Mr Anderson also tips JP Morgan Global Growth and Income, which currently yield 3.55 per cent and has returned 97 per cent over five years.

Investors who prefer passive funds should consider SPDR Global Dividend Aristocrats ETF (GBDV), a low-cost ETF that targets global companies with stable dividend growth for at least a decade. It currently yields 3.56 per cent and is up 23 per cent over three years.

Oliver Smith, portfolio manager at IG Index, says ETFs are an attractive way to generate dividend income because their low charges mean you get to keep more of your money.

While active funds can charge as much as 1.5 per cent year, ETF charges begin from as little as 0.07 per cent.

You could access the FTSE 100’s 4.02 per cent yield through a ETF tracker such as iShares FTSE 100, Vanguard FTSE 100 or the HSBC FTSE 100 UCITS ETF, but Mr Smith also suggests another option for those who want even higher income: the BMO Enhanced Income UK Equity ETF (ZWUK). This, he says, is a specialist fund benchmarked against the UK’s FTSE 100 that also sells “call options” on half the portfolio, which involves selling the right to purchase these stocks at a specific price within a set timeframe. This generates an extra 2 per cent of income, giving the fund an estimated yield of nearly 6 per cent.

Mr Smith warns that selling call options can limit capital growth. “This ETF could modestly outperform the FTSE 100 in a gently rising market and it has total expenses of just 0.30 per cent.”

The US stock market offers a lower yield than rivals such as the UK, but Mr Smith says SPDR S&P US Dividend Aristocrats ETF (USDV) could redress the balance, as it targets companies that have increased their dividend every year for the past 20 years. “These are mature businesses with progressive dividend policies that have shown a willingness to reward shareholders.” The ETF yields 1.85 per cent with charges of 0.35 per cent.

Finally, Mr Smith also tips Lyxor SG Global Quality Income ETF (SGQL), which invests in high-quality global stocks with market-beating dividends. “It looks both at the size of company dividends and avoids companies with highly leveraged balance sheets.”