Understanding High Dividend ETFs to Generate Passive Income
Investing in high dividend ETFs is a popular strategy among many investors seeking to generate regular passive income, notably through a PEA or a standard brokerage account (CTO). These ETFs select companies paying above-average dividends, thus offering an attractive annual yield, often between 3.5% and 5%. In this article, we analyze in detail two flagship ETFs on the market: Vanguard FTSE All-World High Dividend Yield (VHYL, ISIN IE00B8GKDB10) and iShares STOXX Global Select Dividend 100 (ISPA, IE00B0M62Q58), as well as other European options like iShares Core MSCI Europe (IMEU, IE00B4K48X80). We will also examine the advantages and pitfalls related to French taxation, compare them with growth ETFs, and discuss the relevance of a combined "barbell" strategy.
Overview of High Dividend ETFs
Vanguard FTSE All-World High Dividend Yield (VHYL) is a global ETF providing exposure to over 1,600 high dividend-paying listed companies. Its TER (Total Expense Ratio) is very competitive at 0.29%, which is important to limit the erosion of gains over the long term. The dividend yield averages between 3.5% and 4% per year, which is attractive for investors seeking a stable income stream. VHYL covers diversified sectors and is eligible for the PEA, allowing for favorable tax treatment (see below).
iShares STOXX Global Select Dividend 100 (ISPA) is a more selective ETF, based on an index comprising 100 global high dividend yield companies. Its TER is higher at 0.46%, but it compensates with a higher average dividend yield, around 5% per year. This ETF is accessible via a CTO but not through a PEA, which affects the applicable taxation.
Finally, iShares Core MSCI Europe (IMEU), with a very low TER of 0.12%, offers exposure to large and mid-cap European companies, focusing on those regularly paying dividends. The yield is more moderate, around 2.5% to 3%, but the ETF benefits from low fees and a solid track record of total performance.
Comparison of Key Features
ETF
ISIN
TER (%)
Dividend Yield (%)
Number of Holdings
PEA Eligible
Vanguard FTSE All-World High Dividend Yield (VHYL)
IE00B8GKDB10
0.29
3.5 - 4
1600+
Yes
iShares STOXX Global Select Dividend 100 (ISPA)
IE00B0M62Q58
0.46
~5
100
No
iShares Core MSCI Europe (IMEU)
IE00B4K48X80
0.12
2.5 - 3
400+
Yes
The Pitfall of High Dividend Yield: Total Performance Analysis
A high dividend yield does not guarantee superior total performance. For example, an ETF paying a net dividend of 5% but whose net asset value declines by 2% over the year achieves a total return of only +3%. Conversely, a growth ETF with no dividend, delivering a capital gain of +7%, generates a higher total return.
This dynamic is explained by the fact that companies with very high dividends can sometimes be struggling, distributing a large portion of their profits to attract investors at the expense of future growth. It is therefore crucial to assess the balance between dividend yield and growth potential.
French Taxation: Impact on Income from High Dividend ETFs
In France, dividends received are subject to a flat tax of 30% (12.8% income tax + 17.2% social contributions) upon payment, even when ETFs are held in a standard brokerage account (CTO). This means that the passive income generated is immediately reduced by this taxation.
In contrast, within a Plan d’Épargne en Actions (PEA), dividends reinvested within the ETF are not taxed as long as the PEA is maintained (minimum 5 years). Only withdrawals from the PEA trigger taxation, which is generally more favorable, or even nil if withdrawn after 8 years.
Moreover, ETFs eligible for the PEA, such as VHYL or IMEU, thus benefit from deferred and optimized taxation, making this wrapper particularly attractive for a long-term passive income strategy.
Dividend ETFs vs Growth ETFs: Which to Choose for 20 Years?
Over a 20-year period, historical data shows that growth ETFs have often outperformed dividend ETFs in terms of total return, mainly thanks to the compounding of gains and reinvestment of profits into company growth.
For example, an MSCI World Growth ETF has generated an average annual return around 9-10% over two decades, while high dividend ETFs, with yields of 3-5%, have often delivered total annual returns closer to 6-7%, dividends reinvested.
This difference is explained by the lower retention of earnings by high dividend companies, which prioritize distribution to shareholders rather than internal investment.
Barbell Strategy: Combining Growth and Dividend ETFs
To reconcile capital growth and income generation, a so-called "barbell" strategy is recommended. It consists of allocating about 70% of the portfolio to a growth World ETF (e.g., Vanguard FTSE All-World UCITS ETF or iShares MSCI World Growth) and 30% to one or more high dividend ETFs such as VHYL or ISPA.
This approach allows benefiting from the long-term upside potential of growth companies while receiving regular income from dividends. It is particularly suitable for investors in the decumulation phase or nearing retirement, with an investment horizon of 5 to 10 years.
Who Should Invest in High Dividend ETFs?
High dividend ETFs are particularly suited for:
Retirees or pre-retirees seeking to supplement their regular income without selling assets.
Investors in the consumption phase who need a stable cash flow.
Investors with a medium-term horizon (5-10 years) wanting some income stability while maintaining growth potential.
Conversely, younger investors with a long horizon (>15 years) may prefer a larger exposure to growth ETFs to maximize gain compounding.
Conclusion: Actionable Recommendations
To generate passive income via high dividend ETFs, here are our recommendations:
Favor low TER ETFs such as VHYL (0.29%) or IMEU (0.12%) to limit costs.
Use a PEA to benefit from favorable taxation and automatic dividend reinvestment without immediate tax.
Avoid focusing solely on high dividend yield, which can mask low or negative total performance.
Adopt a barbell strategy combining 70% growth ETFs and 30% dividend ETFs for a balance between growth and income.
Adjust your allocation according to your profile, age, and investment horizon.
In summary, high dividend ETFs like VHYL and ISPA are effective tools for generating passive income but should be integrated into a well-thought-out overall strategy, considering taxation and market dynamics.
Disclaimer: This article is provided for informational purposes only and does not constitute personalized investment advice. Past performance is not indicative of future results. It is recommended to consult a financial advisor before making any investment decisions.
