5 Top-Rated ETFs for Income

These are products designed to offer regular, low-volatility dividends, regardless of market conditions.

What constitutes a good high-dividend strategy for passive funds? Today, income investors are increasingly attracted to ETFs because they're easy to buy, transparent, and cheap.

Iinvestors should also looking for funds with stable payouts and constant dividend growth anyway, rather than the highest yield. 

For dividend stock investors, there's always the possibility of falling into a "dividend trap", which is when a high yield masks problems with high debt and profitability and a dividend is cut or scrapped.

Dividend ETFs try to avoid this by balancing their yield from current income with the portfolio's long-term capital growth. However, strategies may vary from fund to fund, and it's worth understanding how often the portfolio gets rebalanced and what index the ETF is replicating.

Five Highly Rated Dividend ETFs

Below we list five income ETFs, with a Medalist Rating of Silver and Gold, each for a different geographic region. We've highlighted commentary by our team of analysts on passive strategies below:

iShares MSCI Europe Quality Dividend ESG UCITS ETF EUR (QDVX)
• Morningstar Medalist Rating: Gold
• Morningstar Category: Europe Equity Income
• Ongoing Charge: 0.28%
• 12 Month Yield: 3.36%

This strategy earns a Morningstar Medalist Rating of Gold. The analysis of the portfolio shows it has maintained an overweight in liquidity exposure and an underweight in volatility exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. Low volatility exposure is rooted in stocks that have a lower standard deviation of returns. This particular ETF is overweight technology by 4.9 percentage points in terms of assets compared with the category average. The portfolio is positioned across 81 holdings and is relatively top-heavy. Of the strategy's assets, 30.5% are concentrated within the top 10 holdings, compared to the category's 19.0% average. Fees (0.28%) are among the lowest in the category.

SPDR® S&P US Dividend Aristocrats UCITS ETF (UDVD)
• Morningstar Medalist Rating: Silver
• Morningstar Category: US Equity Income
• Ongoing Charge: 0.35%
• 12 Month Yield: 2.14%

This US-focused strategy shows a greater presence of mid- and small-cap stocks than its peers within the Morningstar category, and the portfolio has maintained an overweight exposure to liquidity and quality stocks. In recent years, this fund has consistently moved towards higher volume stocks than its Morningstar peers. This gives managers greater flexibility during bear markets to sell without adversely affecting prices. In recent months, the strategy has been more exposed to liquidity factors than its direct competitors. The strategy has also had a defensive bias.

Performance-wise, the ETF has been sub-par over the short term but strong over the long term. Over the past five years, the fund slightly underperformed the category index (a benchmark chosen by Morningstar for the peer group) 0.36 percentage points, but outperformed its average peer by 1.4 percentage points. More importantly, on a 10-year basis, this share class led the index by an annualised 0.75%. It has also been leading the index with a higher risk-adjusted return over the trailing 10-year period. Often, higher returns are associated with more risk. However, this strategy stayed in line with the benchmark's standard deviation. As well as its low cost (0.35%), these factors earn it a Medalist Rating of Silver.

L&G Quality Equity Dividends ESG Exclusions UK UCITS ETF (LDUK)
• Morningstar Medalist Rating: Silver
• Morningstar Category: UK Equity Income
• Ongoing Charge: 0.24%
• 12 Month Yield: 5.00%

The analysis of this strategy's portfolio shows it has maintained a significant overweight position in quality exposure and yield exposure compared with category peers. It invests in stocks with low financial leverage and strong returns on equity, giving it a high exposure to quality. These holdings also tend to be high dividend-paying or buyback stocks. The portfolio – which is positioned across 37 holdings and is relatively top-heavy – is overweight in financial services and basic materials relative to the category average by 29.9 and 3.6 percentage points, respectively. This ETF maintains a sizeable cost advantage over competitors, priced within the cheapest fee quintile among peers (at 0.24%), and earns a Morningstar Medalist Rating of Silver.

Fidelity Global Quality Income ETF (FGQI)
• Morningstar Medalist Rating: Gold
• Morningstar Category: Global Equity Income
• Ongoing Charge: 0.40%
• 12 Month Yield: 2.68%

This strategy earns a Morningstar Medalist Rating of Gold. Over the past three-year period, it beat the category index by an annualised 0.65 percentage points and outperformed the category average by 3.1 percentage points. And more importantly, when looking across a longer horizon, the strategy came out ahead. On a five-year basis, it led the index by an annualised 3.8 percentage points.

The fund's risk-adjusted performance only makes its profile look better. The share class led the index over the trailing five-year period. These strong risk-adjusted results have not resulted in a bumpier ride for investors. This strategy took on similar risk as the benchmark, as measured by standard deviation. 

The portfolio is overweight in technology and consumer cyclical relative to the category average by 4.4% and 2.7%, respectively. The sectors with low exposure compared to category peers are consumer defensive and financial services. The ongoing charge is 0.40%.

Fidelity Emerging Markets Quality Income UCITS ETF (FEME)
• Morningstar Medalist Rating: Gold
• Morningstar Category: Global Emerging Markets Equity
• Ongoing Charge: 0.35%
• 12 Month Yield: 3.62%

This fund maintains a sizeable cost advantage over competitors, priced within the second-cheapest fee quintile among peers. The portfolio has allocations in its top two sectors – industrials and basic materials – that are similar to the category. The sectors with low exposure compared to category peers are consumer defensive and communication services; however, the allocations are similar to the category. The portfolio is composed of 179 holdings and is diversified among those holdings. In its most recent portfolio, 20.2% of the portfolio's assets were concentrated in the top 10 fund holdings, compared to the category average's 35.5%.

The fund's long-term track record is largely no longer applicable, as it is not necessarily representative of the current strategy. The new team took the reins in March 2022 and, looking at its performance so far, it has posted admirable results. For the most recent two-year period, the strategy garnered a 1.1% return through month-end, over its peers' average 1.7% loss and the category index's 1.0% loss. Taking risk into account, over the past year, the strategy had a similar standard deviation, a measure of variation of returns, to the benchmark. Morningstar analysts assign it a Medalist Rating of Gold.