Investors looking for high dividend payouts from their equity portfolios are spoilt for choice in the ETF market, with nine funds offering high yields from Australian shares.
What investors may not realise is that each fund is guided by a distinct set of rules that determine its stock selections. Some have produced better results than others.
Based on returns over the 12 months to the end of September, the ETF Securities High Yield Equity Fund produced a total return of 15.3 per cent and paid a net yield of 9 per cent.
Vanguard Australian Shares High Yield ETF produced a total return of 12.7 per cent over the 12 months and paid a net yield of 7.5 per cent.
Russell’s High Dividend Australian Shares ETF and State Street’s SPDR MSCI Australian Select High Dividend Yield Fund both produced returns above 10 per cent and paid yields around 5 per cent.
The fund with the lowest total return performance was BetaShares Australian Dividend Harvester, which lost 6.1 per cent over the 12 months. However, the fund’s yield was above 11 per cent.
Kris Walesby, the executive director of ETF Securities Australia, says many investors may not realise that each high yield equity ETF will operate according to a different set of rules and these will affect outcomes.
Stocks in the ETF Securities fund are drawn from the S&P/ASX 300. The portfolio is made up of the 40 stocks with the highest yield (defined as the amount of dividends and share buybacks in the past year) and it also screens for liquidity, dividend growth and free cashflow.
The liquidity filter eliminates any company that has less than $1 million of three-month average daily turnover. The cashflow filter ensures that stocks in the portfolio pay their dividends and share buybacks out of earnings rather than borrowings.
A third filter screens for dividend growth. Companies must have had growth in their dividend from the previous year.
“These filters help ensure that the dividend is growing and also that it is sustainable,” Walesby says.
“Many investors look at the headline yield figure and base their investment decision on that. That can be dangerous because you are ignoring the capital component in the return. Yield is only one part of the story and you have to get the right balance to and have good prospects of sustainable yield.”
He says that if a fund targets yield only it may fall into a dividend trap. It may buy a stock that will lose value after it pays a dividend; it may buy a stock whose dividends are paid out of borrowings or are otherwise unsustainable; or it may buy a stock whose yield is high because its share price.