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ETF in Focus: iShares UK Dividend

This three star exchange traded fund is among the top five most viewed ETFs with Morningstar readers. Our analysts examine what it has to offer your portfolio

Hortense Bioy, CFA 9 October, 2014 | 4:34PM

Following a disappointing start to 2014, UK dividends are expected to grow by more than 5% for the full year against a backdrop of improving outlooks for the UK and global economies, according to Capita Registrars. In fact, Britain is set to grow faster than any G7 nation this year, supported by a falling unemployment rate, a booming housing market, rising investments, and low inflation. The strength of the UK economy, compounded by the latest speeches of Bank of England Governor Mark Carney, has prompted markets to bring forward expected hikes in UK interest rates to early 2015.  

The iShares UK Dividend UCITS ETF (IUKD), which offers exposure to the 50 highest yielding UK stocks, is a suitable tool to implement different strategies. This broadly diversified, large and mid cap-focused fund could easily serve as an alternative core UK equity holding for investors seeking a regular income stream. It could also be considered as a satellite holding.

Additionally, this fund may suit investors looking to protect their portfolio from inflation’s effects. Empirical studies have shown that companies that tend to pay out rising dividends generally provide goods and services that are able to keep pace with inflation. For example, utilities, energy and food companies find ways to pass on their input costs to consumers.

Sector-wise, the fund is biased towards financials, which account for 35-40% of the portfolio weighting, while by style, the fund leans towards value. Weighting by dividend yield rather than market capitalisation results in a tilt towards smaller and deeper value companies. Investors looking at this fund should therefore be aware of value traps. A value trap occurs when a company’s dividend yield is high only because its share price is low, reflecting the fact that the company may be in trouble. Also, while some companies may pay large dividends, the effects of capital appreciation/depreciation can dominate the positive income stream.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
iShares UK Dividend ETF GBP Dist766.30 GBX-0.45

About Author

Hortense Bioy, CFA

Hortense Bioy, CFA  is director of passive funds and sustainability research in Europe for Morningstar

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