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Dividend shares are (in my opinion) one of the best ways to target a long-term passive income. With the use of a Stocks and Shares ISA, investors can build a large and steady income stream with shares, trusts and exchange-traded funds (ETFs).
ISA investors don’t have to pay a penny in tax on the dividends they receive. What’s more, unlike a Self-Invested Personal Pension (SIPP), ISA users aren’t liable to pay income tax when they withdraw their cash.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Choosing funds
It’s critical to remember that dividends are never guaranteed, as company payouts during the pandemic showed. As the Covid-19 crisis exploded, even the most reliable of passive income stocks cut, postponed or cancelled dividends entirely as earnings faltered and balance sheets deteriorated.
Yet over the long term, we’ve seen that a well-diversified portfolio can deliver a reliable stream of dividends. A portfolio whose holdings are spread across dozens of companies, industries and regions can provide a solid income across all points of the economic cycle.
Here are two top ETFs worth considering that I believe could deliver a large long-term dividend income.
1. Broad appeal
With holdings in scores of companies worldwide, the SPDR S&P Global Dividend Aristocrats UCITS ETF (LSE:GBDV) offers excellent diversification straight off the bat.
It’s designed to track the performance of high-yield global shares “that have followed a managed-dividends policy of increasing or maintaining dividends for at least 10 consecutive years“. Prioritising dividend growth reduces the erosionary impact of inflation on returns over time.
In total, this ETF has holdings in just over 100 different shares. Major holdings range from Verizon Communications and CVS Health to Universal Corp.
On the downside, half the fund (49.5%) is tied up in US shares. This means it carries greater geographical risk than more regionally spread vehicles. However, this allocation also taps into the long-term outperformance that Wall Street has enjoyed.
This SPDR ETF’s quest for dividend growth doesn’t mean that yields are sacrificed however. Its 12-month trailing dividend yield’s currently a market-beating 3.9%. During the last five years, the fund’s delivered a total average annual return of 10.5%.
2. A targeted approach
Investing in property stocks is another way to target a dependable passive income. There are many themed ETFs available to play this hand, one of which is the iShares MSCI Target UK Real Estate (LSE:UKRE).
Thanks to their consistent rental incomes, property stocks tend to enjoy consistent cash flows that support regular dividend payments. I like this particular fund because it focuses more specifically on real estate investment trusts (REITs). These investment vehicles are required to pay at least 90% of annual earnings from their rental operations out in dividends.
What’s more, the REITs it holds span multiple sectors including healthcare, retail and residential, providing an attractive balance of reward and safety. A large portion of the fund’s also dedicated to UK government bonds as well, which provides added security.
Since 2020, this iShares fund has delivered an average annual return of just 0.6%. It could continue disappointing if interest rates remain higher than normal. But with inflation dropping, I expect returns to improve strongly from this point.
The 12-month trailing dividend yield here’s a huge 6.6%.
