Passive income is a regular income stream that requires very little effort, such as dividend payments from shares. Although, there are some fantastic high dividend-paying stocks in the FTSE 100, I’m a fan of exchange-traded funds (ETFs). In particular, a passive income ETF is one of my favourite long-term investments for hands-off returns.
There are three benefits to this kind of investment. First, an ETF allows me to invest in multiple companies by just holding one share. Second, it pays me a regular dividend at certain intervals throughout the year. Third, there’s also the potential for price appreciation of the fund.
My passive income ETF pick
The dividend-paying ETF I’m looking at is one I’ve studied before, iShares FTSE UK Dividend GBP UCTIS ETF (LSE: IUKD). This fund aims to replicate the return of the FTSE UK Dividend + Index by investing in the 50 firms with the highest dividend yields in the FTSE 350.
It has a low expense ratio of 0.4%, good trading volume, and is large. Looking at the firms included shows just how well it’s diversified across industry sectors. For example, established well-known companies like Rio Tinto, National Grid, and Vodafone are just a few of the largest holdings.
One of the main risks in a high-yield fund like this is the dividend trap. Some of these high-paying companies will be mature businesses that are great at generating free cash flows. However, some will feel they have to maintain high dividends to keep their investors happy when the company itself is not growing. In the long run, such companies could falter.
That said, there’s a 5% cap on any individual holding in the fund, which should provide resilience in case any individual company significantly underperforms.
Long-term income stream
This ETF’s performance has been good, gaining around 20% over the last 12 months and around 5% year-to-date. Despite recent market wobbles, I’m still optimistic about the 2022 outlook for the UK stock market and it wouldn’t surprise me if this fund continues to gain.
The current dividend yield is 5.78%, which is paid quarterly. Though it’s less than some of the best dividend payers in the FTSE 100, it’s good enough for my own portfolio. The trade-off is that I’m giving up the chance of higher returns from individual stocks for the benefit of owning multiple companies through a single share.
No investment is guaranteed, but I’m looking for a simple, long-term, passive 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.
Therefore, on balance, this passive income ETF is an investment I’d be comfortable keeping for years. I would be happy to consider this for my own holdings as part of a balanced portfolio.
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Niki Jerath has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone. 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.