Australian high dividend ETFs an income winner if you look past market volatility

For investing for income and not short term capital gain Australian high dividend ETFs are a solid option
Australia has one of the highest income paying equity markets in the world for investors
Investors spoiled for choice with a range of Australian high dividend ETFs on the market

In the final of our series on income producing ETFs we look at Australian high dividend ETFs. Investors are certainly spoiled for choice with a raft of Australian high dividend ETFs available, too many to mention them all.

BetaShares chief economist David Bassanese told Stockhead when you move up to equity EFTs from fixed income and bonds, yields are higher but obviously so is risk associated with share markets.

“You get higher income, you get franking credits but you do get more volatility which is the trade-off investors have to deal with,” Bassanese said.

“If you are a long term investor investing for income and not short term capital gains and accept there will be short run volatility, then it’s one of the best ways to generate income.”

He said Australia has one of the highest income paying equity markets in the world.

“It’s in part to the strength of our banking sector which still offer good dividends,” he said.

Tricky period for equity markets

Bassanese said there is potential for short term risk with a climate of economic uncertainty globally, particularly in the US.

“At the moment there’s going to be greater than normal volatility but there could be some great buying opportunities,” he said.

Bassanese said BetaShares Australian Financials Sector ETF (ASX:QFN) tracks the performance of an index comprising the largest ASX-listed companies in the financial sector including the Big 4 banks and insurance companies.

“It’s giving at the moment a gross yield including franking credits of 5.3%,” he said.

Bassanese said BetaShares Australian Top 20 Equity Yield Maximiser Fund (managed fund) (ASX:YMAX) generates quarterly income and reduces the volatility of portfolio returns by implementing an equity income investment strategy over a portfolio of the 20 largest blue-chip shares listed on the ASX.

“It catches options premium by selling calls against the fund or portfolio of stocks but the beauty is it is offering a gross yield of 11.9%,” he said.

“Volatility in the market premiums on options have gone up so as a result it’s delivering an even better income.”

He said BetaShares Global Income Leaders ETF (ASX:INCM) track the performance of an index comprising 100 high-yielding global companies, excluding Australia, selected for their potential to generate attractive and sustainable income.

“That is yielding 3.8% at the moment but the other advantage in an environment like now is it has a defensive exposure with the top sectors financials, utilities, consumer staples and health care, so would probably hold off better in an equity selloff than the general market.”

Vanguard sees popularity rise of dividend ETF

Vanguard Australian Shares High Yield ETF (ASX:VHY) seeks to track the return of the FTSE Australia High Dividend Yield Index. The ETF provides exposure to companies listed on the ASX that have higher forecast dividends relative to other ASX-listed companies.

Security diversification is achieved by restricting the proportion invested in any one industry to 40% of the total ETF and 10% for any one company.

Vanguard’s Head of ETF Capital Markets, Asia-Pacific Minh Tieu, told Stockhead VHY was Vanguard’s fourth most popular ETF in Q2, recording $137 million in cash inflows, up 18% since Q1.

“The bump in popularity is likely a result of investors seeking greater yield outside of cash and fixed income products as recent rate hikes take time to filter down,” he said.

“High-yield ETFs such as VHY are sound building blocks for a broadly diversified portfolio and favoured in particular by retirees for its income.

“All investors however, as with all investments, should understand the risks involved and that dividends will vary dependent on market performance.”

VanEck head of investments and capital markets Russel Chesler said the VanEck Morningstar Australian Moat Income ETF (ASX:DVDY) is a high conviction portfolio focusing on high dividend, quality companies based on Morningstar’s Economic Moat assessment and strong financial health based on Morningstar’s Distance to Default measure.

“With rising input costs, higher wages and labour shortages it is still too early to tell which companies have been successful in navigating cost increases or that have positioned for the post-COVID period,” he said.

Chesler said analysts need to look beyond balance sheet data and incorporate market-related information, which is what Morningstar’s Distance to Default measure does.

“For many retirees and income-seeking investors, equity investing is comprised of buying shares in cyclicals such as the big banks and mega-cap miners,” he said.

With more than 50% of total dividends in Australia being paid by Australian banks historically he said many local equity income strategies have a significant exposure, creating concentration risk.

“DVDY with its equal weighting methodology is underweight the banks with an allocation 12.3% compared to almost 20% in the S&P/ASX 200.

Good for retires

Stockspot founder Chris Brycki said VHY was by far the biggest dividend ETF in the Australian market with assets $2.2 billion AUM.

“For some clients, like retirees, high yield dividend ETFs are an attractive way to supplement their retirement income,” he said.

He said a reason they make VHY available to clients is it can help boost dividend returns without giving away the potential for capital returns.

“A total return approach to investing combines both the capital return (the price of the investment rising over time) and income returns.

“We prefer this approach compared to only focusing on income because it allows you to maximise your overall return potential while controlling for risk.”

Stockspot recently compared Australian high dividend ETFs based on several criteria.