What is dividend yield? A guide to equity ETF income (2024)

Whether you’re an investor seeking to build a robust income portfolio or are eager to explore the potential cash flow from listed investments, there is one fundamental metric that holds the key to success: the ‘dividend yield’, or ‘distribution yield’.

Understanding the dividend yield is paramount, as it plays a pivotal role in evaluating the income potential of various investment opportunities including exchange-traded funds (ETF) and other exchange-traded products (ETP) that invest in equities (shares).

What is dividend yield?

At its core, the dividend yield, or distribution yield, represents the income generated by an equity ETF based on the dividends paid by the underlying holdings, which are passed through to unitholders in the form of distributions. Those distributions may comprise one or more of the following:

  • Dividends from Australian and international equities
  • Capital gains from the sale of investments within a fund
  • Interest payments from cash

The amalgamation of those various sources of income that is paid to equity ETF investors is referred to as a distribution, which is used to calculate the dividend yield or just the ‘yield’ for the ETF.

How is the dividend yield calculated? Dividend yield formula

Just like a share, the dividend yield, or distribution yield, for an ETF is expressed as a percentage of the ETF’s market price, providing investors with a useful measure of the income that the fund has been paying over a specified period (usually 12 months).

For instance, INCMGlobal Income Leaders ETF had a net asset value (or ‘NAV’) of $15.14 per unit on 31 October 2023 and paid distributions of 68 cents per unit over the preceding 12 months. Its dividend yield (or distribution yield) for that 12-month period would be calculated as follows:

  • Distribution amount per unit / NAV per unit x 100%
  • $0.68 / $15.14 x 100% = 4.5%

In this example, the ETF’s dividend yield is 4.5%, meaning an investor received a 4.5% return on their investment from distributions, based on the NAV per unit of $15.14.

It’s important to note dividend yields are always retrospective. Past dividend yield metrics and performance are not an indicator or guarantee of future distribution or dividend payments or performance.

Creating a sustainable dividend yield with ETFs

Many Australian investors have a love affair with income investing, given the popularity of shares that historically have paid relatively high dividend yields such as Commonwealth Bank, National Australia Bank, Wesfarmers, Telstra, BHP and Rio Tinto held in portfolios and self-managed superannuation funds (SMSF).

However, the landscape of income investing is evolving, with a number of key trends reshaping how investors approach building portfolios for a sustainable dividend yield:

  • Growing choice of income ETFs: Purpose-built dividend and income ETFs on the ASX have grown over the last decade, simplifying investing in a diversified basket of income-paying assets with a single trade, saving time and costs from having to analyse and manage a large number of individual securities. Furthermore, many ETFs also offer distribution reinvestment plans (DRP), allowing investors to compound and grow their cash flows.
  • Options beyond Australian equities: ETFs now offer a broader range of income opportunities, encompassing asset classes including fixed income, REITs, infrastructure securities, international shares, as well as thematic and strategy-based funds, providing other income solutions that were harder to access before the 2010s.
  • Importance of income diversification: Past events and cycles, including the global financial crisis, the COVID-19 market crash, and the prolonged low-interest rate environment for much of the last 15 years, have underscored the importance of diversification in income investing. Relying on one asset class, such as Australian equities, could lead to increased cash flow volatility if distributions are cut.

Factors for assessing ETFs’ dividend yield sustainability

When integrating dividend ETFs into your investment strategy, keep these crucial factors in mind when assessing different products:

  • Fees: Compare management fees to keep costs in check, however, it’s also critical to ensure any products under consideration align with your objectives and goals.
  • Asset class: Understand which asset class(es) the ETF invests in. Equities may have the potential to offer growing but more volatile income streams, while bonds can provide more stable cash flows.
  • Sector and regional exposures: Analyse the ETF’s sectors and regions of investment. For example, while a focus on the financial sector may have the potential to provide higher income, it could also bring heightened risk of reduced dividends during economic challenges.
  • Holdings: Review at least the top underlying companies or securities the ETF invests in, and the track record these have in paying and increasing distributions over time.
  • Strategy: Assess the ETF’s underlying index or strategy and how it selects securities for income potential and sustainability. Be mindful that certain ETFs employ options strategies, which may not suit all investors’ preferences or risk profiles.

Ideas for an attractive and sustainable dividend yield

Betashares offers a number of solutions designed for investors seeking to create a sustainable dividend yield.

  • YMAX

    Australian Top 20 Equity Yield Maximiser Fund (managed fund)

    Fundpage →Downloadfactsheet →

YMAX aims to generate attractive quarterly income and reduce the volatility of portfolio returns by implementing an equity income investment strategy over a portfolio of the 20 largest blue-chip shares listed on the ASX.

  • UMAX

    S&P 500 Yield Maximiser Fund (managed fund)

    Fundpage →Downloadfactsheet →

UMAX aims to generate attractive quarterly income and reduce the volatility of portfolio returns by implementing an equity income investment strategy over a portfolio of stocks comprising the S&P 500 Index.

QMAX aims to provide regular income along with exposure to a portfolio of the top 100 companies listed on the Nasdaq stock market. In addition, the Fund aims to provide lower overall volatility than the underlying Nasdaq-100 Index.

  • HVST

    Australian Dividend Harvester Fund (managed fund)

    Fundpage →Downloadfactsheet →

HVST aims to provide franked income surpassing the net income yield of the broad Australian share market on an annual basis by actively managing a portfolio of 40-60 domestic stocks.

  • INCM

    Global Income Leaders ETF

    Fundpage →Downloadfactsheet →

INCM aims to generate attractive income from a diversified portfolio of 100 international shares that have been screened for their potential to generate regular and sustainable dividends, including 3M, IBM, Western Union and BMW.

Diversification remains a key tenet in navigating the complexities of the financial markets, especially after witnessing past events that underscore the importance of spreading income sources across various asset classes to protect cash flow.

The increasing popularity of ETFs offers investors a diverse range of solutions in the income toolbox. This opens up the possibility of crafting portfolios with a stronger and more resilient dividend yield that aligns better with your risk appetite and needs.

Betashares recently launched our new investing platform, Betashares Direct, which allows investors to buy ETFs traded on Australian exchanges with zero brokerage and no account fees. Betashares Direct also offers fractional investments in ETFs, helping to reduce residual cash holdings and increase efficiency, as well as an AutoPilot feature that allows you to set up automated, recurring investments.

And with a broad range of low cost ETFs available on the ASX, it’s easy to keep costs low when building a diversified portfolio.

Register for early access

Refer to the Product Disclosure Statement for information on interest retained by Betashares on cash balances and portfolio fees associated with AutoPilot portfolios.

Investing involves risk. The value of an investment and income distributions can go down as well as up. An investment in a Betashares Fund should only be considered as a part of a broader portfolio, taking into account your particular circ*mstances, including your tolerance for risk. Before making an investment decision you should consider the relevant Product Disclosure Statement and Target Market Determination (available at www.betashares.com.au) and your particular circ*mstances, and obtain financial advice.

What is dividend yield? A guide to equity ETF income (1)

Written by

Patrick Poke

Content Director

Formerly Managing Editor at Livewire Markets. Passionate about investments, markets, and economics.

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What is dividend yield? A guide to equity ETF income (2024)


What is dividend yield? A guide to equity ETF income? ›

Just like a share, the dividend yield, or distribution yield, for an ETF is expressed as a percentage of the ETF's market price, providing investors with a useful measure of the income that the fund has been paying over a specified period (usually 12 months).

What is a dividend yield on an ETF? ›

Dividend yield is a ratio that shows you how much income you earn in dividend payouts per year for every dollar invested in a stock, a mutual fund or an exchange-traded fund (ETF). To put it another way, dividend yield is a security's annual dividend payment expressed as a percentage of its current price.

What does 7% dividend yield mean? ›

The dividend yield is a financial ratio that tells you the percentage of a company's share price that it pays out in dividends each year. For example, if a company has a $20 share price and pays a dividend of $1 per year, its dividend yield would be 5%.

Are high dividend yield ETFs good? ›

High-dividend ETFs may generate income

You can also reinvest those dividends back into the fund, to better take advantage of compound interest, and grow your investment portfolio. Whatever you choose, dividend-paying ETFs make it easy to add a large variety of investments to your portfolio all at once.

What dividend stock ETF has a 12% yield? ›

Top 100 Highest Dividend Yield ETFs
SymbolNameDividend Yield
QRMIGlobal X NASDAQ 100 Risk Managed Income ETF12.32%
YMAXYieldMax Universe Fund of Option Income ETFs12.30%
XRMIGlobal X S&P 500 Risk Managed Income ETF12.28%
RYLDGlobal X Russell 2000 Covered Call ETF12.26%
93 more rows

What is considered a good dividend yield? ›

The average dividend yield on S&P 500 index companies that pay a dividend historically fluctuates somewhere between 2% and 5%, depending on market conditions. 7 In general, it pays to do your homework on stocks yielding more than 8% to find out what is truly going on with the company.

How are ETF dividends paid out? ›

ETF issuers collect any dividends paid by the companies whose stocks are held in the fund, and they then pay those dividends to their shareholders. They may pay the money directly to the shareholders, or reinvest it in the fund.

How is dividend yield paid out? ›

Dividends, a distribution of a portion of a company's earnings, are generally paid in cash every quarter to shareholders. The dividend yield is the annual dividend per share divided by the share price, expressed as a percentage; it will fluctuate with the price of the stock.

What is the average dividend yield of the S&P 500? ›

S&P 500 Dividend Yield (I:SP500DYT)

S&P 500 Dividend Yield is at 1.35%, compared to 1.47% last month and 1.66% last year. This is lower than the long term average of 1.84%.

What is best dividend yield? ›

Frequently Asked Questions
Fund NameFund Category5 Year Return (Annualized)
Aditya Birla Sun Life Dividend Yield FundEquity22.96 % p.a.
SBI Dividend Yield FundEquityNA
Templeton India Equity Income FundEquity24.49 % p.a.
Sundaram Dividend Yield FundEquity20.62 % p.a.
1 more row

What is the downside of dividend ETF? ›

Cons. No guarantee of future dividends. Stock price declines may offset yield. Dividends are taxed in the year they are distributed to shareholders.

Can you live off ETF dividends? ›

So what does it mean to live off your dividends? If you invest in dividend-paying stocks, mutual funds, or ETFs, which provide distributions of stocks or cash to shareholders, over time, the cash generated by those dividend payments can supplement your income when you retire.

How many dividend ETFs should I own? ›

Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.

What is the best ETF for income? ›

What Is an Income ETF?
Income ETFYield (TTM) as of April 29*5-year annualized return**
Schwab U.S. Dividend Equity ETF (SCHD)3.3%11.6%
SPDR S&P Dividend ETF (SDY)2.5%7.9%
Vanguard High Dividend Yield ETF (VYM)2.8%9.5%
WisdomTree U.S. Quality Dividend Growth Fund (DGRW)1.6%13.2%
4 more rows

How to use ETFs for generating income? ›

Most ETF income is generated by the fund's underlying holdings. Typically, that means dividends from stocks or interest (coupons) from bonds. Dividends: These are a portion of the company's earnings paid out in cash or shares to stockholders on a per-share basis, sometimes to attract investors to buy the stock.

How often do dividend ETFs pay? ›

Dividend-paying exchange-traded funds (ETFs) have been growing in popularity, especially among investors looking for high yields and more stability from their portfolios. As with stocks and many mutual funds, most ETFs pay their dividends quarterly—once every three months.

Are dividend yield funds good? ›

Dividend yield mutual funds are ideal for investors who are looking for a regular source of income. These mutual fund schemes are also suitable for investors who want to invest in equity but are looking for lower volatility.

What does 30 day yield mean on ETF? ›

It is calculated by taking the total interest earned in an ETF's portfolio over the course of 30 days, subtracting any ETF expenses, and dividing by the maximum share price of the fund on the last day of that period to obtain a percentage value. This value is then annualized.

Are ETF dividends automatically reinvested? ›

Automatic dividend reinvestment plans (DRIPs) directly from the fund sponsor aren't yet available on all ETFs although most brokerages will allow you to set up a DRIP for any ETF that pays dividends. This can be a smart idea because there's often a longer settlement time required by ETFs.

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