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

Global interest rates are at record lows and investors are searching for returns in excess of what they can get on bank deposits. Today we will take a look at some of the equity ETFs that have been designed to deliver high dividend yield.

By 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.

TickerNameRegionAnnual YieldFranking12 month performanceMarket Cap
UBS IQ Research Preferred Australian Dividend FundAustralia4.41%82.07%-3.44%$24.5m
FDIVVaneck Vectors S&P/ASX Franked Dividend ETFAustralia$3.5m
iShares S&P/ASX Dividend Opportunities FundAustralia4.80%81.99%-9.12%$242.7m
VanEck Vectors Small Cap Dividend Payers ETFAustralia2.87%65.89%15.63%$43.5m
Russell Australian Responsible Investment ETFAustralia6.10%7.08%-0.34%$34.1m
Russell High Dividend Australian Shares ETFAustralia5.17%69.47%-5.29%$285.2m
SPDR MSCI Australia Select High Dividend Yield FundAustralia7.93%56.88%-5.83%$165.8m
Vanguard Australian Shares High Yield ETFAustralia5.47%85.54%-6.08%$675.3m
SPDR S&P Global Dividend FundGlobal3.49%2.46%-3.95%$89.6m
ANZ ETFS S&P/ASX 300 High Yield Plus ETFAustralia2.89%35.90%2.28%$5.2m
ANZ ETFS S&P 500 High Yield Low Volatility ETFUSA3.42%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.

TickerNameRegionAnnual YieldFranking12 month performanceMarket Cap
Aurora Dividend Income TrustAustralia6.39%100%-14.29%$14.5m
Betashares Australian Dividend Harvester FundAustralia11.74%66.06%-8.33%$211.2m
Betashares S&P 500 Yield Maximiser FundUSA6.49%0-8.04%$68.8m
Betashares Australian Top 20 Equity Yield MaximiserAustralia10.42%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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BrettKimEdwardLeon Recent comment authors
Edward
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Edward

Can you please list a few of the more important downsides to owning shares in an ETF that they don’t tell us about? Or at least, that a dummy like me doesn’t know. Also, I own some HVST and am scratching my head as to why, at a time when everyone is chasing dividend (which HVST provides regularly at a prodigious 10%+), the share price has declined consistently throughout that time. Which goes back to my first question. Any input very much appreciated.

Leon
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Leon

Presumably the price falls because the strategy is to buy shares cum-dividend and then sell ex-dividend. In a stable market you would therefore expect the sell price to be less than the buy price and therefore the HVST unit price to reflect the consequences of this strategy. Hopefully, because dividends are being “harvested” where the shares are held for short periods, the annualised yield is high and overcomes the capital deterioration. But please note that I am not expert in this, but this seems to be a logical explanation!

Edward
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Edward

Thanks Leon for taking the time to send in a comment. My problem is this: As I understand it, ETF’s by law have to distribute all of their income – I assume nett income – and that figure should come from the – reduced to bare bones – mathematical result of a. buying the shares (expense), b. collecting the dividend (income), c. selling the shares (income) and d. deducting a fee (expense). This exercise must be positive for me to get a dividend, so where does the capital depreciation come from? Clearly, I’m missing something. And if there is capital… Read more »

Kim
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Kim

I currently hold a lot of HVST and I’m staring at a current loss of over 16k, meanwhile it has returned to me via direct net dividends of just over 7k. I get the sinking feeling, that you’re right, and all they are doing is returning a portion of my capital with the so called high yielding dividends. I tracked HVST’s chart as compared to the companies it holds & the XJO, and the trend is down down down. When by right, it should at least be going sideways with the rest of the market. I have asked Betashares to… Read more »

Brett
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Brett

Kim, I assume you go the same document outlining it as I did. Really it ws just a load of garbage and HVST should be avoided at all costs. Like you i lost a lot of money, but I feel that ETFs that focus on Dividend harvesting are not the way forward.

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