London Stock Exchange: 2 Dividend-Efficient ETFs Investors Can Buy for Less Than $100

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Tim Phillips

March 3, 2022

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While there is global uncertainty stemming Russia’s invasion of Ukraine, history suggests that long-term investors should continue to keep investing no matter what.

That’s because, over the past seven or eight decades – amid wars and pandemics – the world’s largest stock market (that of the US) has always recovered from periods of declines to keep rising.

Recently I wrote a “cheat sheet” for investors interested in buying stocks listed on the London Stock Exchange, which is one of the biggest stock markets in Europe.

However, I’ve also talked about both the benefits of building out your portfolio with dividend stocks, especially in times of uncertainty.

So, while investors may be aware that US-listed stocks and exchange-traded funds (ETFs) typically carry a 30% dividend withholding tax, readers may be glad to know that preferable dividend options do exist.

That’s because London-listed ETFs – domiciled in Ireland – actually carry only a 15% dividend withholding tax – half the rate of their US equivalents.

And as we all know, ETFs are great vehicles that allow investors to grow their wealth over the long term.

With that, here are two popular, dividend-efficient London-listed ETFs that investors can buy for under US$100 apiece.

1. Vanguard S&P 500 UCITS ETF

If you’re investing via an ETF, then the S&P 500 Index in the US tends to be to “must-have” index in your portfolio since it gives investors broad exposure to 500 of the biggest US companies.

With the Vanguard S&P 500 UCITS ETF (LSE: VUSD) (LSE: VUSA), that’s exactly what investors will get at an extremely low cost but with the added advantage of a 15% withholding tax on regular dividend payments.

Investors will also have the chance to buy the ETF in either US Dollars or British Pounds (GBP), as the Vanguard S&P 500 UCITS ETF has a dual-currency offering.

The ETF’s largest holdings are what you’d expect from a typical S&P 500 ETF. As of 31 January 2022, its top five holdings were Apple Inc (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT), Alphabet Inc (NASDAQ: GOOGL), Amazon.com Inc (NASDAQ: AMZN) and Tesla Inc (NASDAQ: TSLA).

With an expense ratio of just 0.07%, the ETF also distributes dividends to shareholders four times a year – having paid out at the end of every quarter in 2021 (see below).

Vanguard VUSD dividends

Source: Vanguard S&P 500 UCITS ETF (VUSA) Distribution class factsheet

With a dividend per share (DPS) that totals US$0.958 over the past year, the Vanguard S&P 500 UCITS ETF yields 1.2%. However, after the 15% withholding tax deduction, it yields 1.0%.

While not a lot, that’s still much better than the 0.8% the ETF would yield if you had to pay the 30% withholding tax imposed in the US.

The ETF is currently trading at around US$83 a share and offers a tax-preferential way to access the US stock market.

2. SPDR MSCI World UCITS ETF

Similarly, the SPDR MSCI World UCITS ETF (LSE: SWRD) (LSE: SWLD) offers investors dual-class currency options when buying it.

As the name suggests, where it differs though is that the SPDR MSCI World ETF tracks the MSCI World Index. And here, the index has over a 30% weighting to stocks in countries outside the US.

While US technology companies still dominate the top 10 holdings, the ETF does have a 6.2% weighting in the Japan market, a 4.2% weighting in the UK market and a 3.4% weighting in the Canada market.

It also has a much larger base of stock holdings, with the ETF holding a whopping 1,521 stocks (versus 509 stocks in the Vanguard S&P 500 UCITS ETF).

With an inception date of only February 2019, this particular ETF is young but over the past year it has delivered a positive return of 16.7%.

Its total expense ratio (TER) is slightly higher than the Vanguard ETF, coming in at 0.12%, but is still extremely low by any other measure.

Meanwhile, it does at least make up for this slightly higher expense ratio by offering investors a higher dividend yield (of 1.8%) which turns out to be 1.5% after the 15% withholding tax given its Irish domicile.

The ETF is also much cheaper to investors to access, with one share of the SPDR MSCI World UCITS ETF costing around US$30.

Always look to optimise returns

When we invest for the long term it’s worth weighing up all available options to us when we buy specific securities.

And when we invest passively, as we do with ETFs, then the impact of compounding over the long term can be diminished by the drag of a dividend withholding tax.

With the above two ETFs that are listed in London, investors can receive dividends that are taxed at a preferential rate of 15% while still gaining access to low-cost investment vehicles that track the largest stock markets in the world.

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips owns shares of Microsoft Corporation.

About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer. In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.