In this episode of “What’s the Risk?” we take a look at the historic performance of the FTSE Australia High Dividend Yield Index. Some people would know an ETF that seeks to track the performance of this index as Vanguard’s VHY ETF.
Dividends and high yield stocks have always been a draw for some investors who may think they are getting something for free with dividends, but it’s important to remember dividends are not free money, that cash comes from somewhere Share prices are influenced by expected future cash flows to shareholders. If cash goes out the door as a dividend, share price and market cap generally fall ex dividend.
Dividends are also not as tax efficient as selling something post a CGT discount, however in Australia most of our largest companies are all large dividends payers, so it’s interesting to take a look at a yield focused index vs a broader index such as the ASX 300, to see whether simply focusing on those companies has provided a better return?
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Synopsis
Understanding the FTSE Australia High Dividend Yield Index (VHY): Risks and Returns
Weas they delve into the FTSE Australia High Dividend Yield Index, the benchmark for Vanguard’s VHY ETF. Discover how this index, designed to track high-dividend Australian companies [00:32], has performed since its 2011 inception against the broader ASX 300.
The discussion highlights crucial considerations for investors, emphasizing that while high yields and franking credits are attractive, dividends are fully taxable, unlike the more tax-efficient capital appreciation [01:38]. The experts analyze the index’s performance, noting its outperformance over the ASX 300 since inception, influenced by periods of low interest rates [03:33].
A key takeaway is the index’s higher concentration in sectors like banking and telecommunications, which have faced challenges, including the Royal Commission for banks and Telstra’s market fluctuations [04:08]. The video also addresses the impact of events like the COVID-19 pandemic on dividend cuts from major companies [05:50].
Learn about the inherent volatility of high-yield funds, reminding investors that they are not risk-free like term deposits, and dividends are never guaranteed [08:56]. The video concludes with a vital caution: the high yield index should not be seen as a “get rich quick” scheme or a guaranteed path to significant market outperformance [07:15]. This comprehensive overview is essential for investors seeking to understand the nuances, risks, and realistic returns associated with high-dividend yield investments in the Australian market.
