Finding a decent income return is becoming increasingly difficult with record-low interest rates and companies cutting dividends. Could the SPDR MSCI Australia Select High Dividend Yield Fund (ASX: SYI) be the solution?
The SYI ETF
The SPDR MSCI Australia Select High Dividend Yield Fund aims to provide exposure to listed Australian companies across a broad range of industries which pay relatively high dividend yields.
As with most ASX dividend ETFs, SYI has a large allocation towards financials; almost a 40% weighting. Unlike other similar ETFs though, SYI avoids investing in real estate investment trusts (REITs) which are normally large components of dividend ETFs.
SYI has a long track record having been listed since 2010, and it is one of the larger ASX dividend ETFs with around $166 million in total assets.
As at 30th June, the ETF’s dividend yield was 6.22%, although this is not a very useful indicator as a trailing yield can be pushed higher as a result of falling share prices.
Although historical returns are not a reliable indicator of future returns, SYI’s long track record may provide some insight into what a long-term investment could look like. Since its inception in 2010, SYI has returned 5.39% per year, which is comprised of a 5.49% return from dividends and -0.10% from share price movements.
The problem with dividend ETFs
These historical returns highlight the potential issue with dividend ETFs; the dividend often comes at the expense of growth. SYI, with no capital growth over the last 10 years, has actually been one of the stronger performers. Many other dividend ETFs have experienced capital losses that have completely overshadowed the dividend being paid.
The other potential issue is that often these dividend ETFs have weightings that are very similar to ASX 200 ETFs, such as the BetaShares Australia 200 ETF (ASX: A200). This is not a problem in itself, although it means that there is really no diversification benefit from holding an ETF like SYI as well as an ASX 200 ETF.
The choice between the two really comes down to the type of investor. One may prefer slightly lower dividends and higher capital growth, while another investor may be more focused on the income return.
The big takeaway here is that dividend ETFs can be a good option for income investors but try not to get sucked in by a high dividend yield. You may not require capital growth, but a large dividend should not come at the expense of the protection of your capital.