UK dividend ETFs at stake as economic forecast improves


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There are currently three UK Dividend ETFs available in Europe

UK dividend forecasts have improved dramatically in 2021 as the country begins to recover from the coronavirus and no longer faces the risk of a no-deal Brexit, however, ETF investors have limited choice to seize the potential rebound .

According to data from the Link Group, UK dividends fell 44% to £ 61.9 billion in 2020, the lowest annual total since 2011, as companies were reeling from the impact of the coronavirus.

Overall, the rapid spread of the coronavirus and the market correction that followed at the end of the first quarter of 2020 led to two-thirds of UK companies canceling or reducing their dividends between the second and fourth quarters.

As Susan Ring, CEO Corporate Markets at Link, said: “This is a terrible result for UK investors, especially those for whom dividends are a major source of income.

“Payments in the UK have been hit more severely than in most peer countries due to their heavy concentration in the hands of a few very large companies, mainly in the oil, mining and banking sectors – all sectors that have had to dramatically reduce dividends. “

While a full-fledged recovery was suspended by a third lockdown, there were some signs of light at the end of the tunnel.

Highlighting this, payment returns stood at £ 1.1bn in 2021, as of January 29, with an additional £ 91m in dividends restored against just £ 27m in cuts, according to data from AJ Bell.

Russ Mold, Chief Investment Officer at AJ Bell, added: “While there is no denying that the economy is very difficult – and hopes of a rapid rebound in activity are fading a bit – the capacity and Companies’ willingness to pay dividend payments suggests that they have planned for the worst case scenario and managed their costs and managed their resources and cash flow accordingly. “

UK Dividend ETF

As a result, UK Dividend ETFs appear well positioned to benefit from the improving economic outlook, however, investors only have three ETFs to choose from.

The $ 939 million iShares UK Dividend UCITS ETF (IUKD), the $ 133 million SPDR S&P UK Dividend Aristocrats ETF (UKDV) and the $ 10.4 million WisdomTree UK Equity Income UCITS ETF (WUKD) are the only strategies to offer direct exposure to the UK at higher yields. companies, but they do it in different ways.

Looking at the largest ETF first, IUKD tracks the FTSE UK Dividend + index which provides exposure to the 50 highest performing companies in the FTSE 350 index.

Launched in 2005 and rebalanced semi-annually, companies are weighted according to their one-year dividend yield forecast, leading to the inclusion of high dividend stocks in the ETF.

While this methodology is straightforward and delivers a distribution yield of 4.03%, as of February 4, it can expose investors to dividend traps by ignoring the underlying fundamentals of a stock.

Too good to be true, a dividend trap occurs when a stock’s high yield becomes unsustainable due to weak fundamentals.

Meanwhile, UKDV tracks the S&P UK High Yield Dividend Aristocrats Index which provides exposure to the 35 highest-paying UK companies in the S&P Europe Broad Market Index.

Where UKDV differs from IUKD is that it only includes companies that have increased or maintained their dividends for at least seven consecutive years.

UKDV currently shows a dividend yield of 4.2% and is heavily exposed to financials (30.2%) which is similar to IUKD (34.1%).

For AJ Bell’s Mold, banks will be particularly important this year as analysts expect the sector to provide more than half of the total dividend growth expected for the FTSE 100 this year, which translates into an increase of 5.6 billion pounds sterling.

Finally, WUKD offers investors exposure to UK companies in the top 33% dividend yield of the WisdomTree International Equity Index.

Stocks are also selected using quality and momentum factors and are given a higher weight in the index if they perform well from a factor perspective.

WUKD has been the best performing ETF of the three over the past five years, yielding 2.5% versus 2% for UKDV and 1.2% for IUKD, which underlines how seriously the sector has been. affected during the coronavirus crisis.

UK dividend ETFs have yet to capture investors’ imaginations, with IUKD being the only product to see its assets grow by over $ 500 million. Instead, investors continue to look to managers active in this segment of the market, but the Woodford scandal in 2019 highlights the potential risks associated with this approach.

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