I’d get started in dividend investing with these FTSE funds

Cogs turning against each other

The volatility in the stock markets plus the political uncertainty regarding Brexit and US-China trade wars have continued into the New Year, but both new and seasoned investors are still looking for reliable dividend shares to boost their investment income. According to Google Trends, in recent weeks, web searches for the term ‘dividend aristocrats‘ have been on the rise. 

In the UK, a dividend aristocrat is usually accepted as a company that has had a minimum of one dividend increase annually for at least 10 years in a row. In the US, that number is often 25 consecutive years. And many investors who buy dividend shares for an income that will help supplement their pensions, will be looking closely at such firms.

Solid dividend funds

So, having set the scene, I think that if you are relatively new to dividend investing, you could start by investing in shares via a simple low-cost FTSE 100 tracker which would offer you an easy way to invest in the largest 100 companies listed domestically.

You may also consider investing via Exchange Traded Funds (ETFs) which you can easily buy or sell like you would any other share. ETFs have offer diversification over asset classes, industries, or global regions.

For example, the iShares UK Dividend UCITS ETF(LSE: IUKD) is a basket of the 50 highest-yielding stocks from the FTSE 350 Index. According to the investment prospectus, “the benchmark index selects the top 50 equity securities based on their one-year forecast dividend yield” and “dividend income will be paid on the shares quarterly.” This ISA-eligible fund’s distribution yield currently stands at 6.9%. As the fund selects companies by their forecast high dividend yields, this ETF has a forward-looking aspect.

Although the high yield of this ETF is appealing, investors should bear in mind that dividend investing is not just about buying shares with the highest dividend yields and hoping that the company will simply do well. What you want to know is whether the company can maintain and increase its profits in the future. An extremely high dividend might be signalling that the market thinks future dividend growth is likely to be low.

Therefore, another ETF you may consider is the SPDR UK Dividend Aristocrats ETF (LSE:UKDV), which “tracks the performance of certain high dividend-yielding equity securities issued by companies from within the UK.  By “measuring the performance of the 40 highest dividend-yielding UK companies that have followed a managed dividends policy of increasing or stable dividends for at least 7 consecutive years,” the funds aims to achieve a balance between seeking high-yields and companies that may maintain or increase their dividend payouts. The fund’s index dividend yield, which measures the weighted average of gross dividend yield of the chosen stocks, is currently 5.6%.

The bottom line

A company’s dividend strength is a reflection of its fundamentals, including a clean and robust balance sheet, excellent capital allocation, strong competitive advantage, and proactive management. In other words, not just any company can grow its dividends year after year. A company that has been able to pay and increase its dividend in both good times and bad would deserve a closer study.

At The Motley Fool many of my colleagues provide detailed coverage of dividend investing and shares. I encourage you to read their articles regularly.

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tezcang has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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