With interest rates beginning to fall, many Australians are searching for better ways to generate income. Traditional cash accounts and term deposits no longer provide the returns they once did. As a result, investing for dividend income has become an increasingly attractive option. In this article we’ll explore how to invest for high dividend yield without taking unnecessary risks. Investing into a diversified portfolio of low-cost exchange-traded funds (ETFs) which include high dividend stocks can help you reach your dividend income objectives, but comes with a different set of risks. If these risks are properly managed you can strike the right balance between income and risk to achieve your goals.
What is dividend yield and why does it matter?
Dividend yield is the percentage of income an investor receives from dividends relative to the price of the investment.
For example: if a stock pays $4 in dividends per year and is priced at $100, its dividend yield is 4%
High dividend yield investments can be a source of steady income, but they come with their own set of trade-offs, especially regarding capital growth. Balancing these aspects is crucial for building a sustainable income strategy.
Best investment options for dividend income
There are different ways to invest for dividend income via the share market – you can invest in shares with high dividend yields like banks, Listed Investment Companies (LICs), REITs or ETFs. Each comes with its own set of benefits and risks.
High-yield ETFs
Low-cost ETFs can be a simple and effective way to gain exposure to high-dividend-yielding stocks across different sectors. ETFs offer diversification, which can help manage risk while providing income.
Our Topaz Income portfolio is a good example. It’s built to generate higher income through ETFs that focus on dividends, while still spreading investments across different countries, asset types and currencies.
Listed Investment Companies (LICs)
LICs are another option for income-focused investors. These are closed-end funds that often have a strong track record of paying dividends.
Real Estate Investment Trusts (REITs)
REITs offer exposure to property income and are legally required to distribute a high portion of earnings as dividends. This can make them attractive to income seekers.
How we do it at Stockspot
The Stockspot Portfolios invest into low cost ETFs across a range of asset classes. While our Topaz Income portfolio specifically focuses on dividends,, our core portfolios have still generated an average annual income return of 1.8% to 4.3% (including franking credits) per financial year since 2014.
What you can see from the trend below is that income had generally been falling steadily in line with the Reserve Bank of Australia (RBA) official cash interest rate, which was also falling. This income then began tracking upwards as the RBA cash rate rebounded upwards, following historic lows following the COVID-19 pandemic. Income from assets like property, shares and government bonds tends to have a strong link with official RBA interest rates. When the RBA cuts interest rates, assets that generate income often rise because investors are attracted to their relatively higher yield. If the price of an asset rises but the income it pays remains the same, then the dividend (or income) yield falls
Franking credits add income
Franking credits are a tax rebate that Australian resident shareholders receive when companies pay dividends from their Australian after-tax profit. These credits can boost your effective income, especially if you hold investments within a tax-advantaged structure like superannuation.
If you invest in ETFs, the franking credits from the underlying companies are passed on to you. For example, the Australian shares ETF in the Stockspot Portfolios added between 0.69% and 0.94% in FY24 just from franking credits.
Our recommended Australian shares ETF offers a relatively high level of franking credits.
How to increase the income yield of your portfolio
Generally, the higher the dividend yield, the higher the risk to your capital. For instance:
- An ETF paying a 4% income may only deliver 2% in capital gains (total return: 6%).
- A broad market ETF might offer 2% in income but deliver 6% capital growth (total return: 8%).
At Stockspot our core portfolios prioritise a total return approach, combining both income and capital appreciation to maximise overall returns while controlling for risk while our Stockspot Topaz Income Portfolio aims to deliver higher annual income, targeting attractive long-term returns from a blend of regular income and capital growth.
For clients who have over $50,000 we do offer Stockspot Themes to customise your portfolio. Stockspot offers many themes which have historically paid higher than average income (see table below). However, if you’re considering adding more income-generating investments, be aware that this often comes at the expense of capital returns.
| Theme | Distribution Yield (income) | Franking Level % | Distribution frequency |
| Australian dividend shares ASX: VHY | 6.1% | 32.7% | Quarterly |
| Australian Property ASX: VAP | 4.7% | 4.1% | Quarterly |
| Australian large companies ASX: SFY | 4.5% | 61.2% | Quarterly |
| Australian socially responsible shares ASX: RARI | 3.9% | 62.6% | Semi-annual |
| Australian Corporate Bonds ASX: VACF | 3.1% | 0% | Quarterly |
| Global Property ASX: REIT | 4.5% | 0% | Semi-annual |
| Infrastructure ASX: IFRA | 3.5% | 0.3% | Quarterly |
A total return approach to investing
Focusing solely on income can leave your portfolio vulnerable to poor diversification and capital loss. A total return strategy considers both:
- Income returns (dividends, distributions)
- Capital gains (investment growth over time)
This balanced method allows flexibility to draw from both sources as needed. Over the five years to 31 March 2025, Stockspot portfolios have returned between 6.3% and 11.4% annually after fees, even performing positively in 2020 when many funds declined.
This video explains more on why this is our preferred income investing strategy.
Investing with total returns in mind gives you the flexibility to draw down from both the income and capital part of your portfolio if needed. It’s also a lower risk strategy compared to only investing in high-income assets which are prone to capital losses and poor diversification.
Income investing frequently asked questions (FAQs)
Q: What is a good dividend yield in Australia?
A: A yield of 3–5% is generally considered attractive, especially when paired with franking credits.
Q: Are ETFs good for dividend income?
A: Yes, ETFs offer diversified exposure to dividend-paying companies and can pass on franking credits.
Q: How do franking credits increase income?
A: Franking credits reduce your tax liability by accounting for corporate tax already paid, boosting your net returns.
Q: Is it safe to invest for income?
A: A diversified ETF portfolio with a focus on total return is a lower-risk strategy than solely chasing high-yield assets alone.
Stockspots total return approach
The next time you see an investment advertised with a high income return, ask yourself “what risk am I taking on my capital to achieve this high income?”
By taking a total return approach, the Stockspot portfolios have been able to perform more consistently in up and down years.
