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The first rule of income investing is to remember that dividends from stocks are never guaranteed. For this reason, it’s important to build a diversified portfolio that can weather individual shocks and still pay a healthy passive income now and over the long term.
Here’s an example of what a well-diversified portfolio might look like:
| Dividend stock | Forward dividend yield |
|---|---|
| Global X Nasdaq 100 Covered Call ETF | 11% |
| Chelverton UK Dividend Trust | 9.4% |
| iShares World Equity High Income ETF (LSE:WINC) | 9.7% |
In total, these investment trusts and exchange-traded funds (ETFs) provide exposure to more than 450 different companies. These span a multitude of regions and sectors, reducing concentration risk and helping to provide a more stable return across the economic cycle.
What’s more, they have enormous dividend yields, as the table shows. To give you an example of the passive income they can throw off, a £20,000 lump sum invested across them could provide a £2,000 dividend income this year alone. I’m also confident they can grow dividends over time.
Here’s why I think they’re worth considering today.
Top fund
Tech stocks aren’t famed for their enormous dividend potential. But the Global X Nasdaq 100 Covered Call ETF works by purchasing Nasdaq shares and selling covered calls on them, redistributing the income to the fund’s shareholders.
This fund provides an added bonus to its holders: it pays monthly distributions, giving investors access to their cash earlier. It can thus be a useful tool for accelerating compounding by shortening intervals between reinvestments. Monthly distributions here have been paid for the last 11 years.
One downside is that there’s limited price appreciation potential, because any price growth above strike prices is forfeited. This can put it at a disadvantage to standard Nasdaq tracker funds. But for dividend hunters, this may be a price worth paying.
Dividend trust
As its name implies, the Chelverton UK Dividend Trust is focused on generating income from British equities. This geographical strategy carries greater concentration risk than more global funds. But given the London stock market’s strong dividend culture, it also has its advantages.
It’s also important to note that, on balance, this trust is still well diversified despite its UK focus. It invests in a range of industries like financial services, consumer goods, energy, and mining.
Furthermore, its capital is evenly distributed, further reducing the threat of individual shocks on overall returns. Hargreaves Services is currently its single largest holding, at 3.5%.
Global leader
To my mind, the iShares World Equity High Income fund offers a brilliant blend of safety and exciting income potential.
Unlike the other high-yield trusts and ETFs I’ve described, its holdings aren’t confined to specific territories. In total, it holds shares in roughly 300 global equities spanning financial services, information technology, telecoms, healthcare, and consumer goods.
This broad range protects investors from nasty localised shocks. But this is not all — its two largest single holdings are cash and US Treasuries, accounting for 6.3% and 5.7% of the portfolio respectively. This provides an added layer of robustness.
The lion’s share of its capital is stashed in the equity market, though. And so it is still highly exposed to stock market movements. But given the long-term resilience of global shares, I believe it’s a top dividend stock to consider.
