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Many people begin their investing journey in April, coinciding with the start of the new £20,000 annual Stocks and Shares ISA allowance. Naturally, some investors will be looking to build a portfolio of dividend stocks designed to generate a second income from day one.
However, finding and researching stocks to form a suitably diversified portfolio can be a laborious task. It may not appeal to those who prefer things to quietly chug along in the background.
Does this hands-off investing approach sound appealing? Well, that’s where exchange-traded funds (ETFs) come in very handy, as they offer a way to invest in a wide range of shares or bonds in one package.
Here, I’ll highlight one dividend-focused ETF that I think is worth considering.
Holding up well in the storm
iShares UK Dividend UCITS ETF (LSE: IUKD) offers a ready-made portfolio of around 50 UK stocks with high dividend yields. Right now, the top five holdings are British American Tobacco, Legal & General, Rio Tinto, BP, and National Grid.
That looks like a balanced spread of stocks to me, as they’re all strong FTSE 100 companies in their respective sectors of tobacco, insurance, mining, oil, and utilities.
The dividend yields are nice and chunky, with British American Tobacco and Legal & General sporting 7.6% and 9% yields, respectively. The ETF’s trailing yield comes in at a respectable 5.33%, which is higher than the FTSE 100’s 3.5%.
Plus, many UK dividend shares have held up pretty well during the recent market turmoil. Indeed, the ETF is actually up 7% year to date, which is a decent showing. By contrast, the tech-driven Nasdaq Composite is down 10% in 2025.
The five-year total return (share price and dividends) is around 100%, which is fantastic. That said, it should be noted that the starting point there — the first half of 2020 — was during the onset of the pandemic when share prices were low.
Risks to bear in mind
Unfortunately, just because UK dividend stocks have held up well so far this year, it doesn’t mean they also won’t head south if the US/global economy enters a recession later this year.
This cannot be ruled out, with the US-China trade war heating up and many companies still in limbo around tariffs. After all, when America sneezes, the world catches a cold, as the old saying goes.
So, while I would expect cheap UK stocks to do better than highly-valued US tech stocks during a downturn, this situation wouldn’t be ideal for the stock market as a whole.
Moreover, companies can cancel their dividends unexpectedly. Some might pause them during a recession.
That said, the fact that the fund holds 50 stocks does mitigate this risk.
Hassle-free passive income
As mentioned, the ETF’s yield is 5.33%. This means that an investor who puts £20,000 into it should expect to receive around £1,066 in passive income every year.
On top of that, there would likely be some share price appreciation over time.
Were they to retain dividends instead of spending them, the total amount would grow to roughly £40,500 after 10 years. A more than doubling! This assumes the same 5.33% yield and a modest 2% rise in the share price across this time, which isn’t guaranteed of course.
