Dusseldorf. An additional monthly income without having to work for it? This is possible with exchange-traded index funds (ETFs), which distribute dividends, interest or option premiums to investors instead of reinvesting directly.
Using data from the comparison platform ExtraETF, the Handelsblatt has put together an example portfolio of three stock ETFs through which investors receive money paid out every year from January to December - depending on the investment amount, additional pocket money or a small additional income.
The prerequisite was that the ETF portfolio should be as broadly diversified as possible. In addition, the current distribution yield had to be at least three percent per year and the distribution yield had to have increased over a period of one, three and five years. This resulted in a portfolio consisting of three ETFs that pays investors money throughout the year.
1. ETF: iShares Stoxx Global Select Dividend 100
The “iShares Stoxx Global Select Dividend 100” (ISIN: DE000A0F5UH1) pays its dividends in January, April, July and October. It is the only ETF that, according to ExtraETF data, covers these months and meets all the criteria while investing globally.
The fund was launched in 2009 and is one of the largest dividend ETFs with assets under management of 5.1 billion euros. The annual cost is 0.46 percent. This makes it significantly more expensive than simple index funds, such as those that track the MSCI All Country World Index (ACWI). Here the costs are sometimes around 0.1 percent.
The ETF brings together three indices: the Stoxx Europe Select Dividend 30 Index, the Stoxx North America Select Dividend 40 Index and the Stoxx Asia/Pacific Select Dividend 30 Index. This creates a basket of 100 stocks.
To be included in the index, companies must have paid dividends in four out of five calendar years, have not experienced negative dividend growth in the past five years, and the payout ratio must be a maximum of 60 percent in Europe and the USA. In Asia/Pacific the limit is 80 percent. The quota is intended to ensure that the selected companies have enough money available to invest in future growth.
The stocks are ranked according to their net dividend yield: the higher the value, the higher the weight in the index, with the upper limit for individual companies being ten percent. The index is rebalanced annually. In addition, a quarterly check is carried out to see whether all companies still meet the selection criteria.
2. ETF: State Street SPDR S&P Global Dividend Aristocrats
The “State Street SPDR S&P Global Dividend Aristocrats” (IE00B9CQXS71) was launched in 2013 and manages assets of almost 1.8 billion euros. It is the only global investing ETF that pays dividends in February, May, August and November and meets all criteria. The annual costs are 0.45 percent.
The ETF invests in dividend stocks from developed and emerging markets worldwide, with Russian, Indian and Chinese stocks only available with restrictions. The investment universe is the globally oriented S&P Global BMI index, which consists of more than 14,000 stocks.
From these, 100 stocks are selected that have been increasing their dividends or at least keeping them constant for at least ten years. The dividend distributions may not be higher than the company's profits, and the dividend yield may not be more than ten percent.
In addition, the market capitalization must be at least one billion dollars and the daily trading volume must be at least five million dollars on average. This is intended to ensure that only healthy and sufficiently large companies are represented.
The composition is fully reviewed and rebalanced twice a year. The weight of an individual share is limited to a maximum of three percent, but must be at least 0.05 percent.
3. ETF: VanEck Morningstar Developed Markets Dividend Leaders
The VanEck Morningstar Developed Markets Dividend Leaders (NL0011683594) pays its dividends in March, June, September and December. It is also the only ETF that covers these months, meets all criteria and invests globally at the same time.
The ETF was launched in 2016. It has grown particularly strongly in recent years, so that it now manages 9.3 billion euros. The annual cost is 0.38 percent.
The index includes the largest 70 percent of stocks from industrialized nations by market capitalization. Only companies that have increased their dividends in the past twelve months, have not reduced their dividends for five years and whose payout ratio is a maximum of 75 percent can be included in the ETF.
Companies that pool capital from investors to invest in real estate (Reits) are excluded. Companies that do not meet certain sustainability criteria and whose shares are not liquid enough are also excluded.
The 100 with the highest dividend yield are selected from the remaining stocks, with the weight of individual stocks being limited to five percent. The composition is reviewed and rebalanced every six months.
The portfolio
If investors were to combine these ETFs and weight them equally, a portfolio would be created that is significantly different from other world ETFs. Stocks from North America would have a weight of 37 percent. Europe would come to almost 43 percent and Asia to 13 percent. The rest is divided between stocks from the Pacific region, Latin America and Eastern Europe.
For comparison: In the MSCI ACWI, stocks from North America currently have a weight of around 66 percent, Asia around 16 percent and Europe just under 14 percent. This would result in a significant rebalancing in favor of European stocks.
There would also be significant changes in the sectors: In the MSCI ACWI, the IT sector has the highest weight at 32 percent, followed by finance with 16.5 percent and industry (10.5 percent).
In the dividend portfolio, however, the IT share is only 1.5 percent. Other focal points are emerging: the financial sector has the highest weighting here (37 percent), followed by energy and utilities (a good nine percent each).
However, the composition can change due to regular review of the ETFs. In addition, the different performance also shifts the weighting of the individual ETFs, which in turn have different priorities.
The income
Anyone who had invested 10,000 euros - a total of 30,000 euros - in the three ETFs presented on January 1, 2023 would have received a total of almost 4,800 euros in dividends before taxes by the end of May. That's around 16 percent of the initial investment.
Taking into account the withholding tax and solidarity surcharge and without taking into account the savings allowance of 1,000 euros per year per person, the sum would have shrunk to around 3,500 euros. The evaluation also shows that the payouts fluctuate greatly.
After deducting taxes, investors would have only received just under 34 euros in the worst month, March 2024. In the best case, June 2023, it would have been 201 euros.
With payouts of 34 to 201 euros, investors would only have earned a small amount of pocket money. In order to get over the limit of 1000 euros, the investment amount would have had to be significantly larger.
Even if investors had increased their initial investment amount tenfold, to 100,000 euros each, the amount paid out would only have exceeded the 1000 euro limit after taxes in nine out of 41 months. In this case, the payouts would have fluctuated between 340 and 2010 euros.
How the payouts will develop in future years is speculative. However, the Handelsblatt has built a calculator in which a range for the future was calculated from the past dividend development.
The return
If you not only pay attention to the distributions, but also aim to build wealth, you have to look at price developments and dividend payments together. A total return can then be calculated for the assumed investment of a total of 30,000 euros. If ETF prices fall, investors can also lose money.
The price increase for the VanEck ETF has been a good 50 percent since 2023, for the iShares ETF it is at least around 30 percent, and the SPDR ETF is significantly behind at around ten percent. Overall, according to the current status (closing price on May 28th), this would result in dividend distributions of almost 4,800 euros and price gains of a good 9,600 euros. The total profit would have been around 14,400 euros before taxes.
With an invested capital of 30,000 euros, this results in a return of a good 50 percent after just under three and a half years. From a return perspective, investors would have done better during this period if they had invested in a broadly diversified global ETF that reinvests its dividend payments.
