A client recently asked us if Stockspot would consider adding a pure ‘dividend themed’ ETF to our portfolios. We thought it was a great question so decided to share our analysis of the best high dividend and income ETFs on the ASX.
- What are the best dividend ETFs of 2022
- Australian high dividend ETFs
- Stockspot’s verdict
- Active high dividend ETFs
- Global high dividend ETFs
- Should you invest in a dividend harvester ETF?
What are the best dividend ETFs?
Each year we compare all 200+ ETFs in our Australian ETF Report. Here we road test the best Australian dividend ETFs and global dividend ETFs listed on the ASX.
We compare them across 5 factors: Size, costs and slippage, liquidity, returns and dividend yield, and track record.
All data in this blog is as of 31 March 2022.
Best Australian high dividend ETFs
- iShares S&P/ASX High Dividend Yield ETF (IHD)
- Russell High Dividend Australian Shares ETF (RDV)
- SPDR MSCI Australia Select High Dividend Yield Fund (SYI)
- Vanguard Australian Shares High Yield ETF (VHY)
- ETFS S&P/ASX 300 High Yield Plus ETF (ZYAU)
- VanEck Morningstar Australian Moat Income ETF (DVDY)
UBS IQ Morningstar Australia Dividend Yield ETF (DIV) was not included as it was removed from the ASX after UBS advised it would be shutting down their ETF offering.
VHY is by far the biggest dividend ETF in the Australian market with ~$2.3b under management. The next largest ETF is a seventh of the size, with IHD managing almost $306m.
Costs and slippage
VHY is the lowest cost ETF in the category with an annual fee of 0.25%. VHY again comes out on top with the lowest slippage (buy/sell spreads) of 0.07% against its peer group (which averages 0.14%). ZYAU has the highest spreads charging 0.17%.
|COST (INDIRECT COST RATIO)||BUY/SELL SPREADS (AKA SLIPPAGE)|
VHY has the most liquidity with $6.4m trading per day. The remaining ETFs are not as liquid given their limited trading activity with SYI trading $0.7m per day while IHD and DVDY both trade almost half a million a day.
Returns and dividend yield
Performance is a total return figure which incorporates both the capital return (i.e. the growth) and income return (i.e. dividends). We recently wrote a blog post proposing that a Total Return approach is more appropriate than just focusing on high dividend yield returns.
All dividend paying ETFs fell during the coronavirus market sell off, but the income from the ETFs helped cushion some of the fall.
VHY was the best performer over the last year, returning 19.23% over the year, followed by SYI who has the highest dividend yield. ZYAU was the worst performer down almost 13%.
The dispersion of performance between the high dividend yield ETFs shows the differences in products due to ETF methodology which can ultimately result in holding different stocks and sectors. 2020 was a year when many companies deferred or halted their dividend payments, meaning there was a high level of turnover in the underlying holdings of dividend ETFs.
|1 Year Total Return||3 Year Total Return (P.A.)||5 Year Total Return (P.A.)||Dividend Yield|
Track record and holdings
The majority of the dividend ETFs were launched in 2010 and 2011 but all track different indexes. RDV was the first dividend ETF to launch out of the group, and focuses on companies with high expected dividend yield while also having a consistency of earnings and dividend growth.
ZYAU is most recent launch, turning 6 years old. VHY is the most diversified with the largest number of holdings at 64.
|Index||Index history (inception date)||ETF history (inception date)||Number of holdings|
|IHD||S&P ASX Australia Dividend Opportunities Accumulation Index||September 2010||December 2010||48|
|RDV||Russell Australia HighDividend Index||May 2010||May 2010||49|
|SYI||MSCI Australia Select HighDividend Yield Index||May 2010||September 2010||29|
|VHY||FTSE Australia High Dividend Yield Index||April 2011||May 2011||64|
|ZYAU||S&P/ASX 300 Shareholder Yield Index||December 2014||June 2015||38|
|DVDY||Morningstar Australia Dividend Yield Focus Index||June 2015||September 2020||24|
The key difference between the 6 Australian share dividend ETFs is the methodology they use to come up with their underlying holdings. Each one has its own unique definition of what constitutes ‘high dividends’.
For example, ZYAU only allows companies that have enough cash in the business to pay dividends and companies cannot have negative share price growth.
SYI ensures all the companies in the ETF pay higher dividends and franking credits than the broader market. Our chosen ETF, VHY, focuses on companies with higher forecasted yields.
Given the methodology differences, all these ETFs will have different holdings as shown by the different sector allocations.
VHY is our preferred Australian dividend ETF given its larger size, lower cost, tighter spreads and broader number of holdings. VHY is offered as part of our Stockspot Themes range for clients who are looking to enhance their income and dividends.
What are the top active dividend ETFs?
There are 6 active ETFs that focus on dividends and income for Australian shares:
- BetaShares Australian Dividend Harvester Fund (managed fund) (HVST)
- BetaShares Legg Mason Equity Income Fund (managed fund) (EINC) and BetaShares Legg Mason Real Income Fund (managed fund) (RINC)
- BetaShares Australian Top 20 Equity Yield Maximiser Fund (managed fund) (YMAX)
- eInvest Income Generator Fund (Managed Fund) (EIGA)
- InvestSMART Australian Equity Income Fund (Managed Fund) (INIF)
- Switzer Dividend Growth Fund (Managed Fund) (SWTZ)
Due to their higher fees, active dividend ETFs have underperformed vanilla market tracking index ETF such as the Vanguard Australian Shares Index ETF (VAS) and only marginally outperformed our preferred dividend ETF, VHY.
|VAS||VHY||Active income ETFs (avg)|
|Total Cost of Ownership||0.14%||0.32%||1.31%|
|VAS||VHY||Active income ETFs (avg)|
|1 Year Dividend Return||5.49%||5.60%||5.13%|
|1 Year Capital Return||9.78%||12.37%||9.33%|
|1 Year Total Return||15.27%||17.97%||14.46%|
What are the top global dividend ETFs?
There are far fewer global share dividend focused ETFs. Australian companies are more likely than their global peers to pay out their earnings as dividends to shareholders.
There are two dividend focused ETFs for global shares:
- BetaShares Global Income Leaders ETF (INCM)
- SPDR S&P Global Dividend Fund (WDIV)
Below is a useful comparison of the two:
|1 Year Return||11.30%||8.74%|
|3 Year Return (p.a.)||2.26%||3.99%|
|5 Year Return (p.a.)||N/A*||6.04%|
|Number of holdings||99||97|
Should you invest in a dividend harvester ETF ?
Dividend harvesting is a strategy that involves buying shares just before they pay dividends and selling them just after dividends have been paid. At face value this sounds like a very sensible way to collect dividends without having to hang onto shares for too long.
However, like any investment strategy that involves timing your entry and exit points, dividend harvesting has risks. The biggest risk with dividend harvesting is shares tend to fall in price on the day they pay their dividend. Therefore any amount you gain in the dividend is likely to be lost on capital returns.
What one hand giveth the other taketh away
This is precisely what tends to happen with ‘dividend investing’ ETFs – they do well capturing dividends but badly at capturing the gradual increase in share prices over time, which is known as capital returns.
An example: The Betashares Dividend Harvester (HVST)
The Betashares Dividend Harvester (HVST) is an ETF that adopts a ‘dividend harvesting’ strategy. It invests in large ASX shares that are about to pay dividends while also selling futures contracts which is a form of hedging to reduce risk.
Over the last 5 years HVST generated a dividend return of around 8% compared to the Australian share market (ASX 300) which returned dividends of ~4%. Sounds too good to be true, right? How does HVST earn much more in dividends?
Dividend harvesting strategies like HVST involve borrowing from future capital returns in order to increase dividends. There is no free lunch, just a different equation.
It would be like if a bank increased the interest rate on your account from 2% to 5% but paid the 3% difference out of the amount you deposited – reducing your initial deposit from $100 to $97.
As you can see, dividend harvesting returns are made-up from capital you invested in the first place.
Are there other income focused ETFs?
There are other ways to focus into dividend shares which don’t involve regularly buying and selling like HVST. There are a range of high yielding ETFs on the ASX that provide higher income and dividends that we have discussed earlier in this article.
For example, VHY doesn’t regularly buy and sell to harvest dividends, it just buys and holds. VHY costs 0.25% in fees compared to HVST which charge 0.90%. That extra 0.65% per year in lower costs is going to boost your returns over many years.
Over the past 5 years, HVST generated income of 8.3% p.a. and a capital loss of -7.9% p.a. so total return of 0.4% p.a.. Over the same period, the Vanguard High Yield ETF (VHY) generated income of 6.2% p.a. and a capital gain of 2.2% p.a. so total return of 8.4% p.a.. In other words, VHY has outperformed HVST by 8% p.a.
|ETF||5 YR DIVIDEND RETURN||5 YR CAPITAL RETURN||5 YR TOTAL RETURN|
|Vanguard Australian Shares Index ETF (VAS)||4.3%||5.1%||9.4%|
|Vanguard Australian Shares High Yield ETF (VHY)||6.2%||2.2%||8.4%|
|Betashares Australian Dividend Harvester Fund (HVST)||8.3%||-7.9%||0.4%|
It’s a good demonstration of how the higher dividend of HVST limits your ability to earn capital returns – an important component of investing in shares.
While most of the ETFs we invest in generate some income via distributions, we don’t offer the specific ‘yield harvesting’ ETF (HVST) mainly because it does lots of buying and selling and has a relatively high fee. Those extra costs are going to drag down returns over the long run compared to lower-cost ETFs with a buy and hold strategy.
We think the Vanguard High Yield ETF (VHY) can help boost dividend returns without giving away the potential for capital returns. This is why we offer VHY as a Stockspot Theme choice for our clients.