During this special week of content on income, we’re highlighting five high-yield equity trackers for five different regions, with a positive Medalist Rating

The dividend trap is real.

If you are looking for funds that prioritise generating a regular income stream rather than focusing purely on growth, income funds might be the right choice for you. These are products designed for investors who want to regular, low-volatility dividends, regardless of market conditions.

But successful income investing depends on many factors, and not just on the selection of a portfolio of good dividend-paying companies.

When looking for periodic income, funds with exposure to the companies with the highest dividend yields can be tempting.

But what constitutes a good high-dividend strategy – especially in the passive universe? Today, income investors are increasingly attracted to exchange traded funds (ETFs) for access to certain markets. They’re easy to buy, transparent, and cheap.

How ETF Investors Can Avoid the Dividend Trap

One consideration is the cost of money.

After all, fixed income securities are not the only ones affected by changes in interest rates. High-dividend products, including popular ones such as ETFs, could also be sensitive to rate fluctuations as they compete with bonds on yield.

But regardless of interest rates, investors should be looking for funds with stable payouts and constant dividend growth anyway, rather than the highest yield. This is because stable and continuous growth in dividends suggests responsible corporate management.

Let’s look at an example.

A company paying a 1.5% dividend with a growth rate of 10% per year can generate more income in six years than a company paying 3% each year. This highlights the importance of understanding which index the ETF is replicating, and how it chooses its securities in order to avoid the so-called “dividend trap”. This occurs when a stock price and its dividend fall over time as a result of high payout ratios, corporate indebtedness, or other factors like the difference between profits and cash.

In general, dividend strategies balance their yield from current income with the portfolio’s ability to provide long-term capital growth. However, strategies may vary from fund to fund; some aim to maximise yield while others prefer a lower but stable long-term income.

This means investors need to conduct due diligence to determine which strategy best suits them.

Which ETFs Should I Consider for Income?

Below we list five income ETFs highlighted by our team of