How you can earn a higher income with ETFs

Despite recent increases, interest rates are still relatively low, with the top-paying instant-access savings accounts remaining under 2%. 

Such rates are also far behind inflation, meaning that cash savings continue to lose value in real terms. 

Investors looking for higher incomes can choose from ETFs paying up to 5% or more. And unlike cash, an ETF investment also offers the potential for capital growth ⁠— though it could fall in value too.  

Here’s how you can earn a higher income with ETFs: 

Equity ETFs

While many investors are looking for stockmarket growth from ETFs, there are also equity ETFs which focus on shares that pay high dividends. 

For example, iShares UK Dividend (ticker IUKD) invests in the shares of 50 high-yielding UK companies such as Imperial Brands, Legal & General and BP. 

The ETF offers dividend income of 6.3% a year, which it pays out quarterly. 

And while the UK’s stock market is known for having companies that pay attractive dividends, there are also ETFs investing in overseas markets that offer good incomes. 

For example, Vanguard FTSE All‑World High Dividend Yield (ticker: VHYL) invests in more than 1,000 companies around the world that pay higher-than-average dividends, and offers a 3.6% yield. 

Bond ETFs

Bond ETFs can be a good source of high income, with those investing in emerging markets or other higher risk bonds potentially yielding over 5% a year. 

For example, UBS Emerging Markets Sovereign Bonds (ticker SBEG) yields 6.2%, while XTrackers USD High Yield Corporate Bond (ticker XUHY) yields 5.7%. 

The former distributes income twice yearly, the latter quarterly. There are also bond ETFs that pay a monthly income.

Property ETFs

Property ETFs, also called Real Estate ETFs, can be another source of cash-beating income. 

Typically, their payouts come from dividends earned from investing in property shares and Real Estate Investment Trusts (REITs). 

For example, iShares European Property Yield (ticker IPRP) offers 2.8% income a year, while VanEck Global Real Estate (ticker TREG) yields 2.4%. The former pays dividends three times a year, the latter pays quarterly. 

Distributing v Accumulating

If you want the income that an ETF earns from its holdings paid out to you, ensure you choose a ‘distributing’ ETF. 

By contrast, an ‘accumulating’ ETF automatically reinvests its income in its holdings, boosting your longer-term returns. 

Some ETFs come in a choice of distributing and accumulating versions. 

With InvestEngine’s DIY service you can invest commission-free in more than 200 equity, bond and property ETFs that offer income. Our Managed service also offers Income portfolios that pay regular income direct to your bank account. 

Important information

Source: Bloomberg (ETF yields), Moneyfacts (saving interest rates), as at 17 August 2022

When investing, your capital is at risk. Past performance is not a reliable predictor of future results

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