Dividends and Distributions: The Gifts That Keep On Giving

Many Australian investors, including those with self-managed superannuation funds (SMSFs), rely on their portfolios for regular income. Traditionally, banks have been reliable sources of income through generous dividends.

For example, broker estimates suggest Westpac Ltd (ASX: WBC) could yield 5.8%, Fortescue Ltd (ASX: FMG) 7%, and BHP Group Ltd (ASX: BHP) 5.35% this year.

But before diving in, it’s crucial to understand dividend yield or distribution yield, a key metric for income-seeking investors.

What is Dividend Yield?

Simply put, the dividend yield represents the income generated by a listed company or ETF, based on dividends paid by its underlying holdings.

These payouts are then passed on to investors as distributions.

For this article, we’ll exclude franking credits for individual stocks, but remember to consult a financial advisor if they impact your situation.

ETFs and Distributions

ETFs distribute income in three main ways:

  1. Dividends from stocks: The ETF pays out distributions from dividends received from its holdings.
  2. Capital gains: When the ETF sells appreciated assets, the generated capital gains are distributed as income.
  3. Interest payments: Interest from cash holdings or bonds within the ETF is distributed to investors.

Calculating Dividend Yield

Similar to individual stocks, the dividend yield for an ETF is expressed as a percentage of its market price. We multiply the ETF’s market price by 100 to arrive at the yield.

This provides a helpful measure of the income the fund has paid over a specific period usually 12 months.

Example:

Imagine ABC ETF has a net asset value (NAV) of $16.00 per unit and paid distributions of $0.75 per unit over the past 12 months. Its dividend yield would be:

Distribution amount per unit / NAV per unit x 100 = $0.75 / $16 x 100 = 4.68%.

This translates to a 4.68% income yield for holding the ETF for a year.

Important Considerations

Past Performance

Don’t be lured by a seemingly high current yield alone. Check the company’s historical dividend yield to ensure it is consistent and has ideally increased over time.

Recent Share Price Movements

A high yield could be due to a recent stock price plunge. If the price falls without an adjusted dividend, the yield becomes inflated and the dividend itself might be unsustainable.

Payout Ratio

Analyse how much of a company’s profits are paid out as dividends. Some investors prefer companies that reinvest at least 50% of their earnings for future growth.

By understanding these factors, you can make informed investment decisions that align with your financial goals and risk tolerance.

Reinvesting dividends earned from their investments, over time, investors can potentially experience portfolio growth through this compounding effect.

 

 

Disclaimer

Data shown on Comparisons of EFTs is sourced by JustStocks employees from the websites of EFT providers, individual Product Disclosure Statements, and historical price data information. All rights reserved. JustStocks does not guarantee the data or content contained herein to be accurate, complete, or timely.

JustStocks provides data and commentary that constitutes general information only. This does not constitute personal financial or professional advice or assistance. The data and information compiled do not consider your investment objectives or your financial circumstances. JustStocks cannot guarantee this website’s accuracy, completeness, or timeliness. JustStocks accepts no responsibility regarding any inaccuracy, omission, or change in information or articles or the data provided. The information published on this site/page should not be relied upon as a substitute for personal financial or professional advice. The information provided may not be appropriate for your circumstances or needs. JustStocks recommends that you seek professional advice from a qualified advisor before you make any decisions.

Articles of Interest