Generating passive income is a top priority for the majority of UK investors today. For evidence, look no further than the most popular shares bought on AJ Bell‘s investment platform over the past month.
There, we see names like insurers Aviva and Legal & General, housebuilder Taylor Wimpey, banks HSBC and NatWest, and asset manager M&G. These are all high-yield FTSE 100 stocks.
Indeed, the average yield of this six-stock basket is 6.7%. So someone investing £20,000 equally in these inside a Stocks and Shares ISA would hope to receive £1,340 in annual passive income.
But would that yield be guaranteed? After all, Taylor Wimpey has been slashing its dividend recently as it navigates high inflation and a tricky housing market. The others are all in the financial sector, which adds concentration risk.
Moreover, the investor would have to buy them all individually, incurring stamp duty and possibly trading fees. But what if there was another way to own these shares — and many more — via a single investment?
High-yield ETF
Enter the iShares UK Dividend ETF (LSE:IUKD), which is run by BlackRock, the world’s largest asset manager. Instead of tracking the entire UK stock market, it specifically targets the highest dividend-paying companies in the FTSE 350.
That’s why we see the stocks I just mentioned. However, on top of these, the fund holds well-known income shares like BP, Rio Tinto, Tesco, ITV, British American Tobacco, National Grid, BT, Unilever, GSK, and LondonMetric Property.
Beyond housebuilders and financial stocks then, the ETF provides exposure to energy, mining, broadcasting, utilities, telecommunications, consumer staples, healthcare, and property. As such, it offers tonnes of diversification.
This means that if one sector runs into trouble, there’s sufficient variety for other companies to still carry on paying out income through the ETF.
Of course, during some sort of rare event like a pandemic or financial meltdown, many stocks could cut their dividends. And it only holds UK shares, which could always fall out of favour for whatever reason. So the ETF is not totally risk-free.
What’s the dividend yield?
That said, I still think it’s worth considering. Because while the fund naturally yields less than the popular six stocks from above, it still offers a decent level of income. On a trailing 12-month basis, the dividend yield is 4.5%.
Were this to be met, the passive income would total around £900 a year. And over time, there should be capital growth on top, albeit at a less explosive level than individual stocks can sometimes deliver.
For example, the iShares UK Dividend ETF had a cracking 2025, delivering a total return of 32%. That’s unlikely to happen again anytime soon, but I would still expect decent long-term compounding, with less risk.
Aiming for higher passive income
If someone invested £300 a month into this ETF for the next 15 years, achieving an 8% total return, they would end up with an ISA worth roughly £103,000. This includes dividends reinvested rather than spent.
At the end of this period, the portfolio would throw off roughly £6,000-£6,500 a year in dividends, assuming modest annual dividend growth along the way.
Should you invest £5,000 in iShares Public – iShares Uk Dividend Ucits ETF right now?
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Ben McPoland owns shares in Aviva, HSBC, Legal & General, and LondonMetric Property.
