Our Pick Of The Best Dividend ETFs On The ASX

Exchange-traded funds (ETFs) are a type of pooled investment that gives you exposure to a group of assets owned by the ETF provider. You own units in the ETF but not the underlying shares or assets. As the name suggests, a dividend ETF is a type of ETF that pays dividends on a regular basis, usually semi-annually or annually.

ETFs are a low-cost, convenient way to diversify your investments. Unlike a mutual or managed fund, ETFs are bought and sold on the Australian Securities Exchange (ASX). Dividend ETFs can help investors generate passive income but you’ll also benefit from any increases in value of the underlying assets as well (e.g., stock price rises over time).

All ETFs that include holdings of companies that pay dividends will deliver dividends to investors. But some ETFs specifically focus on an investment strategy that prioritises stocks likely to pay reliable dividends to shareholders. These dividend ETFs might also be marketed as ‘high yield’ or ‘income’ ETFs.

Dividend ETFs Are Increasing in Popularity

ASX Limited’s senior investment products specialist Roger Daniel told Forbes Advisor that there was more than $600 million of new money invested in dividend ETFs in 2022, which was the highest level of fund flows over the previous six years.

“The adoption of dividend and high-yield ETFs have increased in popularity in recent times, allowing investors access to a basket of dividend or high-yield securities by executing a single trade on ASX,” Daniel said.

“There are a range of ETFs on ASX which fit this profile and they may include ETFs which hold a basket of high-dividend paying companies, or ETFs which seek to generate income beyond just dividends and franking credits by writing call options, otherwise commonly referred to as a ‘covered call’ strategy.”

Daniel said investors had two common misconceptions about owning dividend ETF units: around consistency of income and that an ETF may limit their exposure to a few companies or one particular sector.

“There are many ETFs on ASX which pay out a distribution on an annual basis. By contrast, dividend paying or covered call ETFs will generally pay out their income to investors more frequently, which can be quarterly or even monthly,” he said.

“Generally speaking, dividend focused ETFs will hold a diversified basket of securities without limiting exposure to one particular company or sector, like you would when investing in a stock.”

Total Funds flow into ETFs providing access to regular income or dividend paying investments (Source: ASX)

While dividend ETFs simplify investing in stocks that pay dividends, is this the best option for improving your financial position? Other popular options on the ASX include fixed income ETFs, LICs and REITs, or simply investing in broad-based index ETFs or individual stocks that may deliver strong capital appreciation over time.

Director at Scarlett Financial, Jackie Crane, said that because ETFs are not a separate asset ‘class’ but simply a way of grouping investments, you need to compare the risk versus return of the underlying assets.

“Like any investment, higher yield is generally a result of taking on a higher level of risk, so an ETF invested in bonds will likely have a lower expected return rate over a long period of time in comparison to an ETF that invests in shares.”

Crane said how much of your portfolio you might allocate to income-focused equities compared to other investment strategies would also vary depending on your investment objectives and requirements.

She said it’s wise to ask yourself:

• What is the purpose of your investment?
• Are you wanting security on your capital and to produce income over time, or are you less worried about steady income and instead want the value of your asset to increase over time?
• How much risk are you willing and able to accept?

“A financial advisor can help you discuss and compare your objectives, especially when they may be conflicting,” Crane added.

As we have mentioned, dividend ETFs can be an attractive option for investors because they simplify the process of owning and managing investments in stocks that pay dividends.

However, whether you buy individual shares in a company or gain exposure to its stock via an ETF, dividend payments are not guaranteed. While many Australian companies have a long history of dividend payments, companies may change how much profit they distribute based on declining economic conditions or poor performance, or they may simply stop paying dividends altogether.

Benefits of Investing in a Dividend ETF

• Because ETFs are traded on stock exchanges, you can self-manage your investments via online share trading platforms and trade units of an ETF easily if your investment priorities change
• ETFs generally have no minimum investment requirements
• The fact that ETFs include a variety of stocks also means you’ve instantly diversified your investment, which is generally considered less risky as your gains and losses are not tied to the performance of just one asset or company
• Many Australian companies pay fully or partially franked dividends, which means some or all of the tax has already been paid and the investor is also entitled to a tax rebate.

Potential Downsides of Dividend ETFs

• The broker or investment firm that issues the ETF will charge a fee—however, these fees are usually low compared to a traditional managed fund. You’ll also need to pay brokerage fees each time you buy or sell units in an ETF
• High dividends don’t correlate perfectly with rising share prices. Falling stock prices can mean your investment loses value overall
• You don’t have any control over which assets or companies’ shares are included in a dividend ETF. Of course, if there’s a specific company you want to invest in you can always purchase individual shares separately.
• While ETFs can be considered more tax efficient than revenue gained through a managed fund, you’ll still need to carefully handle taxes to account for capital gains and also foreign income if you invest in an ETF that holds global shares.

Dividend ETFs vary in their composition and investing strategy but these are some key differences to be aware of:

Passive vs. Active ETFs

Many ETFs are similar to index funds, a passively managed investment that aims to replicate the market performance of an index like the ASX 200. An ETF that tracks the ASX 200 would be made up of stocks from the largest 200 companies listed on the ASX, usually in the same proportion to their market value.

There are also actively managed ETFs, where a fund manager adjusts what’s included in the ETF in line with their particular strategy—this extra expertise typically attracts higher fees.

According to Jackie Crane: “Both have their own pros and cons: traditionally a yield index ETF will be cheaper in cost, however, again, the reasons for investing and the level of income or expected return might play into which option suits the investor better.”

Australian vs. Global Dividend ETFs

Large Australian companies listed on the ASX have a good track record of paying reasonably generous dividends, although those dividends can be cyclical and variable as profits wane. Australian shares also tend to pay higher yields than global shares.

However, there are dividend ETFs available on the ASX that include holdings of global stocks and track US-based and other international indexes. These dividend ETFs may be attractive to investors seeking diversification or streamlined exposure to a certain market.

When it comes to choosing the best dividend ETF, remember that while returns may vary, you can take some control over costs by targeting products with low fees.

A recent Livewire survey of 900 investors found that 38.9% were investing in passively managed ETFs, compared to 22% in actively managed ETFs. More than 80% of respondents invest in ETFs with less than half of their portfolio, and hold for the long-term.

Questions to consider as you browse dividend ETF products:

• Are you comfortable with the trade-off between annual management fees and expected returns?
• How is the underlying index designed or how does the ETF issuer determine high dividend-paying companies?
• Does the ETF help you diversify your investments? Does it invest in companies or sectors you want greater exposure to or help you build out a more ideal portfolio?
• Does it match your ESG goals?
• Is there evidence of strong performance over the long-term?

Daniel said it’s important to assess the underlying investments held in the ETF before making a decision to invest.

“The ETF’s investment strategy or the index methodology of the underlying index will set out the rules for inclusion within the ETF or index. By reviewing this content, investors will be better informed to make decisions on whether the ETF and its underlying index aligns with their investment goals.

“For example, an investor considering a dividend focused ETF and does not seek to be exposed to the property or A-REIT sector may search for an ETF which excludes companies from the property A-REIT sector completely.”

Issuers of ETFs will usually provide detailed information on performance via their websites but the information may be labelled or presented differently across numerous sites. Be sure to read available fact sheets and product disclosure statements (PDS) before investing.

Helpful metrics for comparing dividend ETF performance

• Total Return: Typically comprises returns based on the change in price of the ETF, as well as the income generated. Roger Daniel said: “Although price return is an important component of dividend focused ETFs, it’s also important to consider the income return component of performance, both before and after fees.”
• Dividend or Trailing Yield: For stocks a dividend yield is a % that is calculated by taking the sum of the previous 12 months of dividend payments, divided by the current share price. For ETFs, yield is generally based on a weighted average dividend yield of stocks held in the ETF, divided by its current market price. Yield offers a guide to potential future income returns. Some ETF providers may also list a forecast yield based on estimates of future dividends. Generally, a dividend yield of 5% or higher is considered excellent.
• Funds or Assets under management (FUM): The total amount of money or assets the provider is managing and investing. Daniel said FUM can impact spreads—the difference between the price of buying into the ETF and the lowest price at which it could be sold on the ASX—which may impact the total price return.
• Net asset value (NAV) per unit: Calculated daily by the provider, an ETF’s NAV/unit represents the ETF’s total assets, minus liabilities, divided by the total number of ETF units issued, which should provide a guide to its real value. By comparing that to the price quoted on the ASX, you can get a better sense of whether you’re getting a fair deal when you buy or sell.
• Management fees or expense ratio: Annual management fees will be expressed as a percentage and can vary widely between ETFs. “The management expense ratio (MER) is deducted from an ETFs unit price, and therefore it’s expected that the MER will impact the ETFs price return,” Daniel said.
• Index tracking: Daniel added: “For those ETFs that seek to track an index, it’s worth assessing how closely the return performance of the ETF tracks the return performance of the index. Two useful measures of tracking performance are the ETFs tracking difference and tracking error.”

While ETFs listed on the ASX are generally viewed as easy to quickly buy and sell as needed (known as liquidity), you might still want to pay attention to the liquidity of specific ETFs. Daniel said you could consider its bid spread percentage, NAV/unit value, and the dollar value of transactions of the ETF.

“Narrower or tighter bid/ask spreads can be an indicator of greater liquidity in an ETF relative to other ETFs in the same peer group,” he said.

“Prior to purchase of units in an ETF, it’s worth assessing how close the ‘on-screen’ price reflects the ETF’s NAV per unit: larger differentials may indicate a wider bid/ask spread relative to other ETFs.”

Daniel said the ASX reports monthly on investment products to provide data about spreads, trading activity and fund flows.

Forbes Advisor has reviewed dividend ETFs available on the ASX to give you a head-start in researching dividend ETFs with a track record of delivering attractive yields over time that might suit your investing goals.

We’ve focused on ETFs with a strategy to maximise dividends, but it’s worth noting that other sector-based ETFs have a history of great distribution yields, like State Street Global Advisors’ SPDR® S&P®/ASX 200 Resources Fund (OZR) (15.1%) and the BetaShares Resources Sector ETF (QRE) (14.08%). This list is by no means exclusive—and every dividend ETF investor will focus on their particular areas of emphasis, be it NAV, spread, yield or low fees—but rather acts as a guide for further research into potential dividend ETFs.

Name of ETF: Vanguard Australian Shares High Yield ETF (ASX: VHY)
Index: FTSE ASFA Australia High dividend Yield Index
Assets under Management: $2.89 Billion
Number of holdings: 72
Fee / Managed Expense Ratio: 0.25% p.a.
Dividend yield: 5.8%
Distributions per unit: 56 cents (For the quarter to 31 March 2023)
Income distribution: Quarterly
Total return history over five years: 9.04%

Name of ETF: SPDR® S&P®/ASX 200 Resources Fund (OZR)
Index: S&P/ASX 200 Resources Index
Assets under Management: $147.6 million
Number of holdings: 46
Fees / Managed Expense Ratio: 0.34% p.a.
Dividend yield: 7.34%
Distributions per unit: 49 cents (for half-year to 30 Dec 2022)
Income distribution: Twice a year
Total return history over five years: 13%

Name of ETF: Betashares Equity Yield Maximiser Fund (YMAX)
Benchmark Index: N/A
Assets under Management: $387.3 million
Number of holdings: Actively managed portfolio of the 20 largest blue-chip shares on the ASX, with a ‘covered call’ strategy.
Fees / Managed Expense Ratio: 0.97% p.a. (no performance fee)
Dividend yield: 8.8%
Distributions per unit: 14 cents (For the quarter to April 2023)
Income distribution: Quarterly
Total return (after fees) over five years: 6.11%

Name of ETF: Russell Investments High Dividend Australian Shares ETF (RDV)
Index: Russell Australia High Dividend Index
Assets under Management: $238.4 million
Number of holdings: 50
Fees / Managed Expense Ratio: 0.34% p.a.
Dividend yield: 6.71%
Distributions per unit: 43 cents (For the quarter to 31 March 2023)
Income distribution: Quarterly
Total return history over five years: 5.54%

Name of ETF: SPDR MSCI Australia Select High Dividend Yield Fund (SYI)
Index: MSCI Australia Select High Dividend Yield Index
Assets under Management:  $373.91 million
Number of holdings: 62
Fees / Managed Expense Ratio: 0.35% p.a.
Dividend yield: 6.48%
Distributions per unit: 40 cents (For the quarter to 31 March 2023)
Income distribution: Quarterly
Total return history over five years: 7.67%

Name of ETF: BetaShares S&P 500 Yield Maximiser (UMAX)
Index: N/A
Assets under Management: AUD $140.4 Million
Number of holdings: Actively managed portfolio of stocks in S&P 500 Index, comprising the largest 500 US companies.
Fees / Managed Expense Ratio: 0.79% p.a.
Dividend yield: 6.9%
Distributions per unit: 31 cents (For the quarter to April 2023)
Income distribution: Quarterly
Total return history over five years: 9.33%

Name of ETF: SPDR S&P Global Dividend Fund (WDIV)
Index: S&P Global Dividend Aristocrats Index (AUD)
Assets under Management: AUD $25 Billion
Number of holdings: 93.
Fees / Managed Expense Ratio: 0.5% p.a.
Dividend yield: 5.92%
Distributions per unit: 32 cents (for the half-year to Dec 2022)
Income distribution: Twice a year
Total return history over five years: 4.12%

The dividend ETF provider distributes dividends (and associated franking credits) paid by companies held in the ETF at regular intervals—usually quarterly or twice a year. Dividends are just one component of your total returns, which may also include realised capital gains, interest, and foreign income.

Jackie Crane said frequency of returns relative to your income needs may be a deciding factor when comparing dividend ETFs.

“Some ETFS can have quarterly distributions, but the timing can vary depending on the ETF, as well as the underlying holdings and their distribution schedules,” she said.

Some ETFs may also offer a reinvestment plan, where you can choose to automatically reinvest some or all of your returns in the form of additional ETF units.

Dividends are considered income and you’ll also need to pay capital gains tax on any gains you realise through selling units of an ETF. Passively managed ETFs are generally considered tax efficient.

“This may be the case in comparison to managed funds, as ETFs pass through franking credits on to the investor, therefore, there are similar tax advantages to that of holding an individual stock,” Crane said.

However, Crane warned that actively managed ETFs could come with additional tax obligations. “It can be expected that an actively managed ETF may have more transactions occur, if they are selling out of or buying into assets frequently, therefore incurring possible capital gains for the investor,” she said.

The advice, quotes and information provided by ForbesAdvisor is general in nature and is not intended to replace independent financial advice. ForbesAdvisor encourages readers to seek expert advice in relation to their own financial decisions and investments.