The Vanguard Australian Shares High Yield (ASX: VHY) strategy continues to be a dependable pick for investors seeking passive exposure to a portfolio of high-dividend-yielding Australian equities. Our steady conviction is based on the sensible, forward-looking approach that seeks to identify above-average dividend-paying stocks.

Historically, the Australian equities market has facilitated higher dividend yields relative to other developed markets. Vanguard capitalizes on this thesis by fully replicating the FTSE Australia High Dividend Yield Index—an index Vanguard has exclusive rights to replicate. The index comprises mostly large-cap companies with higher dividend forecasts among all the listed companies on the Australian Securities Exchange. Instead of choosing stocks based on their past historical distribution records, the FTSE index selects stocks based on their one-year consensus forecast dividend yields. The forward-looking methodology helps mitigate the risk of falling into dividend traps (companies exhibiting untenable high dividends because of deteriorating price and fundamentals).

After screening the universe by the dividend expectations, the selected constituents are weighted according to their free-float market cap. Thus, despite some sector skews, the portfolio carries a similar risk/reward profile as the broader market. Long-term performance of the strategy has not disappointed investors. Overall, the Vanguard Australian Share High Yield strategy remains a sensible option for those seeking a higher-than-market dividend yield while not missing out on broader market opportunities.

A forward-looking element helps prevent investing in dividend traps but does not eliminate the risk

Vanguard Australian Shares High Yield attempts to fully replicate the FTSE Australia High Dividend Index. The index ranks all dividend-paying stocks in the FTSE Australia 200, excluding property trusts, based on their one-year forward dividend yield (typically from the Institutional Brokers’ Estimate System). Selecting stocks to include until approximately 50% of the float-adjusted market capitalization is reached. Following, a market-cap-weighted approach is applied to determine individual position sizing, and a proprietary screen is applied, which aims to balance the high-yield objective with turnover. The latter being undisclosed helps safeguard the portfolio from pretrading by external parties ahead of index changes, but unfortunately, it removes transparency around its construction.

To avoid concentration in higher-yielding sectors, the index sensibly caps industry exposure at 40% and individual positions at 10%. Through implementing forward-looking screens, it helps the strategy mitigate the risk of dividend traps; however, it cannot be completely prevented in a portfolio with an automated bias to high dividend-payers. The index is rebalanced semiannually, with income distribution made quarterly.

The FTSE Australia High Dividend Yield Index is a market-cap-weighted index made up of companies with higher-than-average forecasted dividends. The biggest sector exposure is financial services, at around 40% of the index. The fund’s exposure to materials has historically been volatile. Following dividend cuts in the sector, exposure dropped to 4% from 20% in 2016. However, a fall in Rio Tinto’s share price and a corresponding increase in yield saw the stock return to the portfolio in June 2017, increasing the strategy’s exposure to the sector to 21%. That came at the expense of industrials exposure, which fell to zero. As of Oct. 31, 2025, materials exposure was at 22%.

The index has a persistent underweighting in the technology and healthcare sectors when compared with the Morningstar Category index. These sectors typically reinvest a large proportion of their cash flow into research and development to drive future earnings growth rather than focusing on high dividend payouts. As a result, the portfolio has a clear value style tilt relative to the category index.

Get Morningstar insights in your inbox