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The ETFs focusing on high dividends, for the yield hungry investor

ETF Watch - Sep 20, 2016

Global interest rates are at record lows and investors are searching for returns in excess of the measly couple of percent they can get on bank deposits. Retirees in particular rely on income returns to fund their pension payments from their super funds, and Australian tax laws favour income payments in the form of dividends for those on low tax brackets. All of the above factors contribute to Australian investors’ obsession with yield. Today we will take a look at some of the equity based ETFs that have been designed specifically to deliver this.

In the ETF Watch fund database we’ve identified 14 ETFs which have a focus on dividend yield. Of these, there’s two main strategies these funds employ to meet their yield objective:

  1. Invest in companies which pay high dividend yield.
  2. Actively trade equities to harvest dividends as they are paid.

Below we take a look at the funds employing each strategy in a bit more detail.

High dividend company focused ETFs

Investors who seek to invest in high dividend paying companies are spoilt for choice, with a total of 10 ETFs listed on the ASX which focus on investing in high dividend paying companies. The table below lists the offerings available.

Ticker Name Region Annual Yield Franking 12 month performance Market Cap
UBS IQ Research Preferred Australian Dividend Fund Australia 4.41% 82.07% -3.44% $24.5m
FDIV Vaneck Vectors S&P/ASX Franked Dividend ETF Australia - - - $3.5m
iShares S&P/ASX Dividend Opportunities Fund Australia 4.80% 81.99% -9.12% $242.7m
VanEck Vectors Small Cap Dividend Payers ETF Australia 2.87% 65.89% 15.63% $43.5m
Russell Australian Responsible Investment ETF Australia 6.10% 7.08% -0.34% $34.1m
Russell High Dividend Australian Shares ETF Australia 5.17% 69.47% -5.29% $285.2m
SPDR MSCI Australia Select High Dividend Yield Fund Australia 7.93% 56.88% -5.83% $165.8m
Vanguard Australian Shares High Yield ETF Australia 5.47% 85.54% -6.08% $675.3m
SPDR S&P Global Dividend Fund Global 3.49% 2.46% -3.95% $89.6m
ANZ ETFS S&P/ASX 300 High Yield Plus ETF Australia 2.89% 35.90% 2.28% $5.2m
ANZ ETFS S&P 500 High Yield Low Volatility ETF USA 3.42% 0% 13.08% $13.5m

*Performance and yield as at 11 August 2016.

Nine of the above focus on Australian companies and two have a USA and Global allocation. There’s a broad range of index methodologies that have been applied to the above ETFs, which means that whilst they may look similar, their actual underlying exposure may be quite different. The index construction methodologies can be very in depth, so we’ll leave it to investors to do their own research on the methodology that suits their needs.

Dividend yields for the last 12 months for this list of ETFs has ranged from 2.89% (for small cap focused fund where yield is expected to be lower) to 7.93%, and there has been huge variation in share price performance with anything from -9.12% to 15.63%. This is where index methodology becomes very important, and we advise investors to be clear as to how the index is determined before blindly investing in these funds.

Dividend Harvesting ETFs

Whilst many mum and dad investors may have invested in their own ‘high dividend portfolio’ through investing in the likes of the big banks and utilities, dividend harvesting strategies are probably less likely on the average investor’s radar. There are four funds available on the ASX which employ this strategy.

Ticker Name Region Annual Yield Franking 12 month performance Market Cap
Aurora Dividend Income Trust Australia 6.39% 100% -14.29% $14.5m
Betashares Australian Dividend Harvester Fund Australia 11.74% 66.06% -8.33% $211.2m
Betashares S&P 500 Yield Maximiser Fund USA 6.49% 0 -8.04% $68.8m
Betashares Australian Top 20 Equity Yield Maximiser Australia 10.42% 46.46% -11.42% $321.4m

*Performance and yield as at 11 August 2016.

Dividend Harvesting (also known as dividend stripping) involves actively buying and selling shares around the dividend payment time, to lock in the dividends that are paid. The rationale being that the share price falls once these companies go ex-dividend is less than the dividend received. Secondly, and important for Australian investors, is the investor is able to ‘harvest’ franking credits which of course are returned as additional income to those on low tax rates such as super funds. This extra franking income offsets the capital loss that is applied.

It’s certainly an interesting strategy and we are not in a position to comment on its merits, but it certainly can return a high yield, with the two Australian based Betashares options returning over 10% dividend yield over the last 12 months (compared to the ASX200 which has returned just under 4%). This high yield has of course been offset by much higher capital losses than the broad index has returned.

What are the other options available to those seeking yield?

Listed Investment Companies (LICs) can be an excellent way for investors to gain access to a reliable dividend income. As LICs pay tax at the corporate tax rate, they bank a large amount of franking credits, as a result are able to pay fully franked dividends. LICs also have discretion as to how much they pay in dividends each year (just like any other company), meaning they can provide a much more reliable income stream than ETFs, which must pay out all of their income. The ETF Watch Fund Database shows 20 LICs with a dividend yield currently tracking at over 5% pa.

There we have it. We hope this post gave the yield obsessed investor a few ideas on the ETFs available to them in Australia. As always, this post is based on general information only and we recommend investors do their own research before making any investment decisions.

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