![Income investing with ETFs](jpg/dividenden-rendite-top.jpg)
What to expect in this article
Finding the right passive source of income
Some private investors buy individual stocks for their portfolio in order to generate income from dividend distributions. They believe that they are able to pick the stocks with the best dividend outcomes. In reality, however, this strategy often results in disappointment. In addition, you will not only find high-dividend securities in your home market, but you will also have to trade on foreign stock exchanges resulting in higher commissions. Besides, diversification is limited. ETFs and funds can invest in a lot more different companies and thus reduce the investment risk by diversification. Actively managed dividend funds represent a second alternative that can offer a diversification comparable to the market index. A handful of fund managers can also look back on a better performance than their benchmark index (outperformance of the benchmark). However, most active funds are unable to outperform the market. Regardless of whether the manager is doing a good or a bad job, you as an investor have to pay substantial management fees each year. On top of this, you need to consider the transaction costs within the fund if the fund manager trades a lot.ETFs: The best way to income from dividends
We believe a portfolio of well-chosen ETFs offers a superior income solution. With one or even more ETFs, you diversify your capital into many individual investments, chosen and weighted by the index provider. Instead of an active fund manager, the underlying index of the ETF selects the stocks with the highest dividends. In this way, you can implement an income portfolio far more cost-efficiently, with less risk and easier maintenance. Lower costs mean more income for you to further invest or to spend.ETF pay-outs: The right ETFs for your dividend strategy
As an investor in ETFs, you always benefit from the dividend payments of the companies you invest in. Depending on whether you prefer distributing or accumulating ETFs, the returns are paid out or reinvested. Therefore, distributing ETFs are a good fit for an income portfolio. Common market indices such as the MSCI World already provide a good dividend income of around 2%. In addition to the classic market indices, there are also specialised dividend ETFs are available. The dividend indices used by these ETFs select and weight their stocks according to their dividend yields of previous periods. There is a wide choice for such ETFs is wide and allows you to benefit from high-dividend companies from all over the world, specific regions or even single countries. But by focusing on dividends, you are taking a risk in comparison to a market index: companies with high dividends usually have conventional business models that may run the risk of being replaced by modern technology and service giants. Furthermore, companies that pay high dividends do not necessarily achieve high profits. Dividends can also be paid out of the company's assets thereby eroding the company’s capital stock. In addition, many companies like to buy back shares instead of distributing profits in the form of dividends. However, the methodologies of the index providers differ considerably and are, therefore, exposed to these risks at varying degrees. It is advisable to take a closer look at the index methodologies before investing. Our introduction to global dividend stocks, European dividend stocks and German dividend stocks gives you a quick yet detailed overview.ETFs with dividend payments: How to measure the dividend yield of an ETF
The dividend yield is another critical factor in determining an ETF's potential for income. It refers to the distribution of an ETF in relation to its price.Dividend yield = Annual dividends per share/cost per share
75p / 1800p = 4.17%
Let the hunt for dividends begin
Start a comparison of dividend yields with the now. In our ETF search site and on the ETF profiles you will find historical and current distribution yields of ETFs and their annual payments versus performance.Information on distributions on ETF profiles at justETF
![Information on distributions on ETF profiles at justETF](/images/news/20210401-aktuelle-ausschuettungsrenditen-uk.png)
Source: justETF Research; as of 01/04/2021