Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


Sizing up Australian dividend-ETFs

Emma Rapaport  |  03 Jul 2019Text size  Decrease  Increase  |  
Email to Friend

Dividend ETFs are a developing feature of the Australian listed product market.

Products belonging to Morningstar’s “dividend” strategic-beta group (Australia) collectively held $2.1 billion of investors’ assets at the beginning of 2019.

And group has been growing at a blistering pace in recent years.

Total net assets - share class in Morningstar's "dividend" strategic-beta group (ASX listed), January 2009 - January 2019

Dividend etf australia growth

Source: Morningstar Direct

This should come as little surprise in the context of the prevailing low interest rates and the secular upward trend in demand for sources of investment income, as the first waves of baby boomers have entered retirement, says Ben Johnson, director of global exchange-traded fund research for Morningstar.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

Of the 13 dividend-ETFs that exist today on the ASX, more than half are less than five years old, with the majority coming into existence since 2014.

As the menu of dividend ETPs expands, it is important that investors understand that not all dividend ETPs are created equal, Johnson says.

"Each has its own unique characteristics, which stem from important--albeit often nuanced--differences in the methodologies of their underlying benchmarks," he says.

Today, we're hunting for dividend ETFs under Morningstar's coverage with medal ratings – Gold, Silver or Bronze. Three funds made the cut.

Morningstar Medalist Dividend-ETFs at 3 July 2019

Dividend etfs morningstar

Source: Mornignstar Direct

Dividend ETFs explained

Unlike passive ETFs which typically replicate the performance of a market index or asset, and often use a market-cap weighted methodology (e.g S&P/ASX 200), Morningstar classifies dividend-ETPs as belonging to the strategic-beta group product group.

Strategic beta (or smart beta) products must still be index tracking, but they typically set aside market cap methodologies and lean towards other factors such value, dividends, low-volatility, momentum and quality - or a combination. 

If you'd like to understand more about smart-beta ETFs, check out our back to basics piece ' Investing basics: what's so 'smart' about smart beta ETFs?'.

When it comes to dividend-ETPs, these products typically start with a regular share portfolio, and then skew the portfolio towards higher than average dividends – current and/or projected.

Each product has its own unique charactertics, which stem from nuanced differences in the methodologies of their underlying benchmarks, Johnson says.

"Understanding three key characteristics of these funds - include dividend yield, dividend growth, and dividend durability - can help investors make more-informed choices," he says.

For example, Vanguard's VHY and Russell's RDV both use forward-looking consensus forecasts. SPDR's SYI focuses on trailing dividends and earnings, say Morningstar fund analysts.

Morningstar senior analyst Matthew Wilkinson says reading the fine print is imperative with any investment but especially in the income space.

"Many product names use "income," "dividend," or "imputation," yet the strategies can vary markedly in cost, complexity, and risk/reward profile. Several high-dividend ETFs launched since 2010. These products are similar but have their nuances," he says.

Given the risk of dividend traps (high-yielding stocks that cut dividends), Morningstar analysts say active strategies offer legitimate competition too. Although they point out that active managers are not immune to mistakes either. 

"The best active managers have been able to protect capital by sidestepping dividend traps”.

Here’s a closer look at the three names on the list.

Vanguard Australian Shares High Yield ETF (VHY)

Morningstar senior analyst Matthew Wilkinson says Vanguard Australian Shares High Yield VHY provides a worthwhile option for Australian equities exposure with good income. For a competitive 0.25 per cent fee, Vanguard tracks the FTSE Australia High Dividend Yield Index via a full-replication approach.

This FTSE index ranks companies by forecast yields and excludes those that do not expect to pay a dividend, resulting in a diversified portfolio with above-average dividends and franking credits. Wilkinson says listed-property trusts are excluded, and there is likely to be minimal technology exposure.

The portfolio has had some mis-steps, such as poorly timed buys into resources over financial year 2016 as declining share prices made the yields of BHP and Rio Tinto appear more attractive, Wilkinson says.

"This highlights the risks of "dividend traps" for a rules-based strategy," he says.

That said, Wilkinson says VHY's use of forward-looking consensus dividend forecasts should help reduce them.

Prem Icon Read full analysis

SPDR MSCI Australia Select High Dividend Yield ETF (SYI)

Former-Morningstar search analyst Sarah Fox says of the SPDR MSCI Australia Select High Dividend Yield ETF SYI that it is a low-cost, effective way to capture exposure to high-dividend-paying Australian shares.

Fox says applying a full replication approach, SYI’s portfolio closely resembles the benchmark, the MSCI Australia Select High Dividend Yield Index. The customised benchmark applies a rules-based dividend overlay that has delivered above-market yield and franking.

"It’s a concentrated portfolio with typically between 35 and 40 names represented, but diversity is sought through the ”10/40 rules”: No security is more than 10 per cent of the portfolio and positions greater than 5 per cent must be trimmed if they total more than 40 per cent," she said.

"Dividend traps are a risk with yield-seeking ETFs. SYI attempts to mitigate this by filtering out companies with unsustainably high and inconsistent dividends and large negative one-year price performance. Investors should bear in mind that dividend filters generate higher turnover than market-cap-weighted ETFs, elevating tax and transaction costs."

Prem Icon Read full analysis

Russell High Dividend Australian Shares ETF (RDV)

Russell High Dividend Australian Shares ETF RDV is a sound option for investors seeking yield at a low cost, as its use of consensus dividend forecasts helps reduce the risk of dividend traps, says Morningstar senior analyst Michael Malseed.

Malseed says RDV tracks the Russell Australia High Dividend Index, which uses a systematic approach to target a diversified portfolio of Australian equities with above-market dividends.

"Among other factors, the strategy uses the Institutional Brokers Estimate System for consensus dividend forecasts which surveys a broad sample set of institutional stockbrokers. This is a superior approach to calculating dividend yield based simply on actual dividends paid over the current market share price, as it has a better chance of identifying situations where a company is about to cut its dividend due to deteriorating operating performance," he says.

While the strategy hasn’t avoided dividend traps entirely, Malseed says it has generally resulted in better positioning versus systematic peers resulting in superior relative performance over the five years to 31 October 2018.

He adds: "while the strategy leans towards stocks with higher franking levels, expected portfolio turnover around 40 per cent, based on semi-annual rebalancing and quarterly distributions, dampens tax effectiveness."

Prem Icon Read full analysis

Full analyst reports and ratings are exclusive to Morningstar Premium members. Sign up for a free 4-week trial to access all Premium reports and benefits instantly.

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend