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Investing in FTSE-based dividend ETFs can be a great way to generate passive income. These products distribute regular cash payments to investors – which can be tax-free if held in a Stocks and Shares ISA – and the yields on offer can be quite attractive.
But how much money would you need to have in one of these ETFs to generate income equivalent to the State Pension? Let’s crunch the numbers.
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A top UK dividend ETF
One of my favourite dividend ETFs is the iShares UK Dividend UCITS ETF (LSE: IUKD). This provides access to 50 UK dividend stocks.
It aims to track the FTSE UK Dividend+ Index, designed to represent the performance of the 50 highest-yielding companies in the FTSE 350 index, excluding investment trusts.
It’s not perfect, of course. At times, it can underperform broader market indexes like the FTSE 100 and the FTSE All-Share due to its focus on high-yield stocks.
Recent performance has been good however – over the last year its share price has risen about 20%. Overall, I see it as a solid dividend play and believe it’s worth considering as part of a diversified portfolio.
What’s the yield?
In terms of income, the trailing 12-month yield on this ETF is currently around 4.6%. A yield is similar to a savings account interest rate.
A yield isn’t guaranteed like a savings account interest rate is though. And yields are not stable – if the price of the ETF rises, the yield will most likely fall (and vice versa).
Matching the State Pension
As for how much money you’d have to have in this ETF to match the State Pension, you’d need to target dividend income of £12,547.60 per year. That’s how much the State Pension is paying these days, assuming you qualify for a full payout.
Taking that yield of 4.6% and crunching the numbers, I calculate that you’d need to have around £273,000 in the product to generate £12,547.60 a year in dividend income. I’m assuming here that the yield remains at 4.6% and that the fund is held in an ISA where income is tax-free (I’m also ignoring platform fees).
Finding £273,000 could be easier than you think…
Now, that obviously sounds like a lot of money. And it is. But if an investor has time before they need that level of income, they could potentially build that kind of lump sum starting with far less money.
For example, if the investor was able to achieve a 7% annual return after fees on their portfolio for 10 years, they’d only need to invest around £140,000 to start with to get to £273,000 after a decade (I’m ignoring the impact of inflation here).
If they were able to achieve higher investment returns with growth stocks, they could potentially build up that much money starting with far less. Just look at how Apple shares have performed over the last decade – they’ve turned £5,000 into around £55,000.
So I wouldn’t be discouraged by the fact that it might take £273,000 in a FTSE dividend ETF to match the State Pension in income. With a good investment strategy, anything’s possible.
Should you invest £5,000 in iShares UK Dividend UCITS ETF right now?
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Edward Sheldon owns shares in Apple.
This story originally appeared on Motley Fool
