Dividends are a great way to earn income from your investments. And distributing ETFs that focus on dividend-paying stocks allow you to diversify across many companies. But there are hundreds of dividend ETFs available, and not all that equally suited for Belgians. Some are poorly diversified, others aren't tax-efficient, or they're too expensive. We picked out the best dividend ETFs so you don't have to. We also look at the downsides of investing in distributing ETFs in Belgium, where the 30% tax on dividends makes them less tax-efficient than accumulating funds.
Why a dividend ETF makes sense
There are a couple of reasons why you might consider investing in a dividend ETF that invests in dividend-paying stocks.
You want income from your investments
Dividend ETFs are designed to provide you with a stream of income through dividends. They are appealing if you're retired or are looking for regular income, as these ETFs invest in a collection of dividend-paying stocks that pay out cash on a quarterly basis.
Dividend-paying stocks have lower risk
Companies that regularly pay dividends are usually well-established and financially stable, which implies a lower risk compared to companies that do not pay dividends. A company like Coca-Cola, which has a long history of paying and increasing dividends, is much more stable than the latest trendy growth stock. And investing in a dividend ETF provides exposure to such stable companies.
How to select the best dividend ETFs
In order to choose the top dividend ETFs for you to invest in, there are some criteria we will stick with as a Belgian investor.
Follows an index
The style of investing based on index funds, also called passive investing, is a superior strategy for most people. Active funds, the type of fund offered by most banks, are a lot more expensive and yield lower returns than an ETF that simply tracks an index.
Distributing ETF
From a taxation point of view, accumulating funds are preferred over distributing funds to avoid paying a 30% tax on dividends. However, as we're focused entirely on dividend ETFs, we focused our list only on the best distributing funds. Note that you can recognise a distributing ETF as it usually has "Dist" or "Distributing" in its name.
High and low dividend yields
We've added a combination of high and lower dividend yield ETFs. Higher dividends also have a higher risk of being reduced, due to the higher payout ratio. This makes a high dividend less reliable and not something you can count on with certainty. Usually, a high dividend gives you higher cash returns. However, the dividends don't always materialise. This risk is higher for individual stocks which is why ETFs are important to counter this risk through diversification.
Low cost
Most ETFs are already low-cost compared to active funds. But when we have the choice between several ETFs tracking the same index, we prefer a cheaper one (all other things being equal). The cost is measured by the total expense ratio (also known as the TER).
Domiciled in Ireland or Luxembourg
Both countries have special tax treaties with many countries around the world. This makes it fiscally advantageous to invest in ETFs domiciled in Ireland or Luxembourg. You can recognise these by their ISIN code that starts with "IE" (Ireland) or "LU" (Luxembourg).
Traded in €
We only selected funds that are trading in Euro as we don’t want to pay unnecessary currency exchange fees.
Diversified across many countries
Diversification is important when investing because it helps to reduce the overall risk. The basic idea behind diversification is to avoid having all your eggs in one basket, so that the impact of a single negative event is reduced. For example, if you only hold one Belgian stock and that company experiences a downturn or crisis, your entire investment portfolio will be negatively impacted and you may not receive a dividend. However, if you had invested in an ETF that diversifies across different countries, the impact of one company on the portfolio would be less severe.
Size matters
Larger funds are less likely to be shut down. A reasonable guideline is to only consider ETFs that have at least €100 million under management.
Replication
Physical replication is preferred over synthetic replication to reduce third-party risk.
The best dividend ETFs for Belgians
Vanguard FTSE All-World High Dividend Yield (IE00B8GKDB10)
The ETF follows the FTSE All-World High Dividend Yield index. Despite its name, it doesn't provide the best dividend yield from our selection but benefits from a lower annual cost than other ETFs and has significant diversification. It invests in 1,855 companies across the globe so is quite diversified across sectors and markets. The ETF is managed by Vanguard and costs are relatively low at 0.29% annually.
SPDR S&P Global Dividend Aristocrats (IE00B9CQXS71)
You're probably curious about the name of the ETF and why "aristocrats" is in the title. If you just go for the highest dividends, you will end up investing in higher-risk stocks. This is because companies often give high dividends because their share price has fallen sharply due to certain problems. A dividend aristocrat is a stock that has been screened for quality, meaning that the company doesn't have much debt, are profitable and keep increasing their dividends.
To be included in the S&P Global Dividend Aristocrats index, the company must have increased its dividends for at least 10 consecutive years and simultaneously have positive return on equity and cash flow from operations.
The ETF includes companies from all over the world, but 40% are based in the United States. There is one breakout Belgian company, Solvay. It's managed by State Street and has a slightly high total expense ratio for an ETF of 0.45% per year.
iShares MSCI World Quality Dividend ESG (IE00BYYHSQ67)
QDVW is an ESG fund which means it follows some sustainability criteria. If the future of our planet is important to you and your investments, you can choose the ETF which excludes some of the most polluting companies to our planet. In total, you'll be invested in 182 companies with around 50% of them based in the United States.
The ETF is offered by iShares (Blackrock) and tracks the MSCI World High Dividend Yield index. It costs you 0.38% per year.
Xtrackers STOXX Global Select Dividend 100 (LU0292096186)
By tracking the STOXX Global Select Dividend 100 index, XGSD provides diversified exposure to global stocks. Essentially, you're investing in 100 equities from global developed markets with historically high dividend payments. When we say "developed" markets, we're talking about countries like the United States, Japan, Australia, United Kingdom and France. The index is reviewed annually and the largest component is capped at 10%. It attempts to generate a significant yield at 8.38%.
The ETF is managed by Xtrackers (DWS) and is on the pricey side with an annual cost at 0.50% per year. Note that it's also not physically replicated. Rather it's a "swap-based" which means that the ETF synthetically replicates the performance of the index by using a swap. So there is a counter-party risk for your investments.
iShares Emerging Markets Dividend (IE00B652H904)
The last one we wanted to feature was an emerging markets ETF. Through the Dow Jones Emerging Markets Select Dividend index, EUNY invests in stocks of companies in emerging markets that pay dividends and have been able to sustain these payments for a considerable amount of time. Companies based in countries such as Brazil, China, Taiwan and India are part of the ETF. These markets are generally less accessible, which translates to a higher annual cost of 0.65% per year compared to the other ETFs in our selection.
Conclusion: which dividend ETF to go for?
The answer is that it depends on you and your goals! I you're looking for the cheapest dividend ETF, we suggest you go for Vanguard's Vanguard FTSE All-World High Dividend Yield ETF. It also offers the most diversification from all of them with 1,855 companies as part of the ETF. The ETF that is providing the best yields is a toss up between two: Xtrackers STOXX Global Select Dividend 100 and iShares Emerging Markets Dividend. If sustainability is important to you, we suggest iShares MSCI World Quality Dividend as a good choice.
Why accumulating ETFs are a better choice for most Belgians
Distributing funds are attractive because of the payout from dividends. But unless you want to earn an income from your investments, they may not be the best option for you.
You are taxed 30% on dividends
Belgium has a 30% tax on dividends. The tax is applicable to individual stocks but also to distributing ETFs! However, accumulating ETFs are exempt from the tax because the dividends are reinvested before they ever reach your bank account. This is the main reason why Belgian investors should favour accumulating funds over distributing funds.
Accumulating funds have a higher return
Investment returns are also better with accumulating ETFs as the money is reinvested automatically for you. You bypass the dividend tax, but also any other fees or taxes you would incur if you were to reinvest the dividends yourself.
The higher returns of accumulating funds are clearly visible in the animation below. It shows the returns over the last 5 years of a distributing and accumulating version of an ETF. The line of the accumulating fund is clearly higher than that of the distributing fund. You can try it out yourself on the justETF website.
Accumulating funds are more in line with a passive approach
You don’t have to worry on how to reinvest the dividends, the fund does it for you. This saves you time and worry.
Young people are better off with accumulating funds
It makes even more sense for young people to invest in accumulating funds. After all, you're likely still in the phase of your life where you're growing your wealth. With accumulating funds, you won't worry about reinvesting the dividends as it's done for you and you can optimally benefit from the effect of compound interest.
Read more on how to build the optimal portfolio of ETFs.
Curvo: an easier and tax efficient way to invest your savings
The portfolios offered through the Curvo app, managed by Dutch investment firm NNEK, are built to stand the test of time. They invest only in assets that are widely understood and that, through decades of research and usage, are predicted to earn significant returns over the decades to come. Concretely, this means index funds of stocks and bonds. We believe that passive investing (also called "index investing") is the best strategy to guarantee long-term success. This follows from our conviction that the financial markets are efficient.
We believe in a "buy-and-hold" strategy, in total alignment with a long term view. Some may call it unsexy, but we are convinced that good investing is boring. When you invest through a Curvo portfolio, you're investing in 7,500 companies. And because all funds are accumulating, they're ideal for the young Belgian who wants to build long-term wealth.
Discover how Curvo works.
Summary
ETFs continue to grow in popularity and continue to help Belgians aiming to take more control of their financial life. The choice between accumulating and distributing ETFs is pivotal; the former reinvests dividends, augmenting the fund's value, while the latter pays out dividends, offering shareholders periodic income. We hope our selection will help you choose the best dividend ETF for you, or at least question if a dividend ETF is really what you're looking for. At Curvo, we're big advocates for a buy-and-hold strategy primarily facilitated by accumulating funds, which not only simplifies your investments but also aligns with the goal of maximising long-term returns.
Questions you may have
Which ETF pays the most dividends?
There are two ETFs which stand out for their dividend yields: Xtrackers STOXX Global Select Dividend 100 (LU0292096186) and iShares Emerging Markets Dividend (IE00B652H904) which both offer a dividend yield of over 8%.
How much dividend does an ETF pay out?
The answer is that it depends on the ETF. You can find the dividend yield in the fund documentation. For instance, a high-dividend yield ETF might offer a yield to over 8%. This number depends on the market environment, the specific sectors it invests in, and the dividend policies of the underlying companies.