Exchange-traded funds (ETFs) are dynamic vehicles that offer the opportunity for growth, income, or both. They usually offer quick diversification due to a basic basket of goods.
There are more than 2,300 ETFs listed London Stock Exchangeso we’ve lost quite a bit of choice in the UK this time.
Here, I will look at an ETF that offers a dividend yield of 5.31%. This one is also growing slowly, having risen about 8% since mid-December.
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UK property
The fund in question is iShares MSCI Target UK Real Estate UCITS ETF (LSE: UKRE). As you might guess from its name, this ETF holds real estate holdings in the form of real estate investment trusts (REITs). These pay out at least 90% of their rental income as dividends.
The top funds in this fund include Segro, Londonmetric property, Real Estate Securities, Tritax Big Boxagain Basic Health Structures. The first three REITS are FTSE 100 while the other two are from FTSE 250.
What I like here is that these stocks offer a very broad exposure to all types of real estate sectors. These come from the warehouses they use Amazondata centres, hotels, theme parks such as Alton Towers, offices, healthcare (GP surgeries and local clinics), and more.
Another attractive feature is that it combines UK property shares with UK inflation-linked government bonds. When the real estate market gets tough, the bond portion should act as a stabilizer.
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Pound/cost balancing strategy
This ETF company paid a dividend of 5.31 %. This means that someone investing £10k can expect £531 back in annual income.
But what if they don’t have this kind of money? After all, 10 grand is hardly pocket change. Well, there is always a pound/cost balancing strategy that can be used. Instead of investing a large sum at once, fixed amounts will be invested periodically (say, £175 every month), whether the market is up, down, or sideways.
This strategy will facilitate environmental change. And after five years of investing £175 a month in this ETF, they will have accumulated £10,500 worth of shares. Based on a trailing yield of 5.31%, these would be paying around £557 in annual dividends.
Now, I simplified things for illustration here. In fact, the price will go up and up, and so will the yield. And while interest payments should hopefully increase this time around, nothing can be guaranteed. This is why diversity can be important.
Also, inflation will probably rise, forcing the Bank of England to raise interest rates. In this scenario, REITs may decline in value, putting pressure on the ETF’s value.
Prices are falling
However, in comparison, this fund I think is worth considering for income.
With interest rates predicted to continue to decline through 2026, the cost of debt for REITs will also decrease. With cheap credit, real estate companies can start buying and developing again. This should see money start to move back into the sector, boosting the ETF’s share price in the process.
