Unconventional wisdom: ASX ETF and LIC dividend champions
Lessons from ETFs and LICs that have delivered over the last decade.
Conventional wisdom is a byproduct of groupthink that presents solutions good enough for the average person while simultaneously not being right for any individual. You follow it at your peril. Each Monday I will challenge the investing norms that just may be holding you back from living the life you want.
Unconventional wisdom: ASX ETF and LIC dividend champions
“I don’t mind going back to daylight saving time. With inflation, the hour will be the only thing I’ve saved all year.”
- Victor Borge
I recently published an article looking at the dividend growth of ASX listed shares in Morningstar’s coverage universe.
The goal was to identify which companies had growth their dividends at a rate well above inflation over the last decades. This is the holy grail for income investors trying to grow the purchasing power of their passive income.
I received several emails asking about ETFs and Listed Investment Companies (“LICs”). These vehicles are popular with income investors who avoid individual shares or wish to supplement their individual share positions.
I’m going to apply similar criteria to ETFs and LICs to see which ones delivered while sharing some thoughts on their advantages and limitations for income investors.
LICs and ETFs
I selected ETFs and LICs holding Australian shares with a minimum 10-year track record. I picked several of the largest and well-known LICs and some ETFs that focus on income. I also included two non-income focused passive ETFs covering a market capitalisation weighted and equal weighted cut of the market.
The type of security has implications for income investors.
ETFs
An ETF is a unit trust which is a pass-through entity. Trusts themselves do not pay tax but instead distribute taxable income to investors. These distributions include net income (interest, dividends, foreign income), realised capital gains, franking credits and foreign tax offsets.
In general, actively managed ETFs or ETFs with more frequent rebalancing will have higher distributed capital gains than a passive ETF tracking a market capitalisation index which doesn’t rebalance. Market conditions also play a role, but you would expect Vanguard Australian Shares to have lower distributed capital gains than the other ETFs on this list.
The other component of ETFs that are a consideration is their requirement to distribute everything in the same period it occurs. Portions of the distributions can’t be reserved for the future.
LICs
A LIC provides more discretion for the managers to choose the timing of payments for investors. Since LICs are actively managed the manager can also select the timing and amount of any changes to the underlying holdings.
The LIC is taxed at the corporate level and once those taxes have been paid the ATO issues a franking credit to the LIC. The manager can pass on the franking credit to investors.
The downside of LICs is that the price is based on investor supply and demand and can deviate from the value of the underlying assets. Many LICs are trading at a discount but that also means investors can capture a higher yield. The focus of this exercise is on income growth, but yield is always a consideration and may be more valuable or less valuable based on the goals of each investor.
Evaluating ETF and LIC income growth
Step one: Beating inflation
The first criteria is consistent with my previous evaluation of shares. I’ve used 36% growth over the previous decade since that was the culmulative impact of inflation. Exceeding 36% growth means increasing inflation adjusted income.
The following chart shows the growth between the 2016 and 2025 distributions.
Step two: Consistently rising dividends
I wanted to account for the variability of year-to-year dividends in Australia but make sure the trajectory was consistently higher. To do this I took the average annual distributiion over the past 10 years and compared that to the 2025 distribution.
Again, I used a 36% cut-off for inclusion onto my list. This is a high hurdle rate, but it further reinforces that only ETFs and LICs that have grown distributions at rates comfortably exceeding inflation will be included.
I included two more steps in the article on individual shares. The first was looking at our analyst estimates for future dividends. The potential for turnover in these ETFs and LICs makes this step irrelevant for this exercise.
The other step was eliminating any share that didn’t pay a dividend in any single year of the last decade. All the ETFs and LICs maintained distributions throughout the decade.
What can we learn from this exercise?
There are several lessons for investors from this exercise. It is worthwhile looking at the overall market as represented by VAS before getting into the three ETFs that met both sets of criteria – MVW, VHY and SYI – and those that didn’t.
Australian dividends aren’t all they are cracked up to be
At first glance the Australian market may appear to be a dividend bonza but there are signs of concern given the income performance of VAS. The overall distribution growth between 2016 and 2025 was only 10.72%. That is less than a third of inflation which means the purchasing power of distributions has dropped meaningfully.
There was also large variations in year-to-year distributions from VAS. The average distribution over the decade was higher than the one in 2025. This can partially be attributed to COVID but many of the other ETFs and LICs avoided this fate.
The largest Australian companies are struggling to grow their dividends which impacts a market capitalisation weighted index. This was apparent in my examination of individual Australian shares. None of the Big 4 banks or large miners met my criteria.
If you look under the hood you can see some of the challenges. The dividend payout rate has been steadily dropping over the last decade. Going into 2016 Australian companies were paying out nearly 80% of their earnings which was historically high. The rate dropped to 63% in 2025. That is below the average of 67% in the decade prior to 2016. This has brought yields down which are below their historic average.
If you are looking at the overall index as an income investor you need to be confident the largest companies will turn this trend around. They will have to grow earnings to support higher dividend levels and increase their payouts to get back to where they were.
Personally, I have little confidence in these large companies. Mining is a capital-intensive industry and reliant on commodity prices. Banks have limited opportunities for growth in a saturated domestic industry with relatively stable market shares.
The equal weighted index has performed much better from a dividend growth perspective. This is not simply a case of growing dividends. The portfolio turnover for MVW is 35% which does generate capital gains which adds to distributions. This doesn’t tell the whole story as the dividend growth has been stronger for smaller companies. The question for investors is if this will continue. I think it will which is why I personally hold MVW.
Some dividend focused ETFs have performed better than others
The results from the four long standing dividend focused ETFs vary. VHY and SPI have delivered while IHD and RDV have fallen short. The key is avoiding dividend traps which may occur if only backward-looking yields are used to select shares for an ETF.
Just looking at the label of an ETF isn’t enough and investors need to understand how the portfolios are constructed. The marketing for an ETF is always going to be slick and the portfolio construction descriptions will sound sophisticated. But track records matter.
Over the past decade VHY and SPI have delivered. Our analysts point out the ways their security selection criteria is designed to avoid dividend traps. In the case of VHY this is done by only focusing on forward projections of yields when picking shares. SPI uses quality and momentum screens to avoid traps.
It should be noted that IHD changed their methodology at the end of 2022 to include an ESG screen while also changing the focus from trailing yields to forward dividend estimates.
All of the dividend ETF distributions will be boosted by capital gains. The portfolio is reconstituted each time the screens are run on the overall share universe to select which ones to include. All four of the ETFs go through this process semi-annually.
The LICs deliver high yields but haven’t delivered inflation beating growth
Each of the LICs delivered consistent distributions with varying levels of growth over the last decade. In all cases that growth fell behind inflation.
However, the discretion LIC managers have on the timing of investor distributions paid off over the previous decade. None of the LICs I explored reduced their distributions during the COVID period while the ETFs experienced a sharp drop in distributions in 2020 and didn’t recover 2019 levels until 2022.
For some investors this consistency may be attractive especially given the high grossed up yields when franking is included. All four LICs have recently provided fully franked distributions to investors. ETFs also pass along franking credits but the franking levels are generally lower.
Final thoughts
Depending upon your goals and circumstances you may tilt towards higher yields or higher dividend growth. All investors benefit from income growth as maintaining purchasing power in a higher inflation environment is critical. However, there are several ways to do this.
Income growth is a product of underlying dividend growth but also reinvestment and additional savings. Higher yields – including franking - mean more growth from income reinvestment and new savings. The tailwind of dividend growth is always welcome. Consider the mix of those different income drivers based on your own personal circumstances.
On a macro level income investors are facing challenges with the Australian market. Going forward security selection of both individual shares and through vehicles like ETFs and LICs may play a bigger role in the overall outcomes achieved by investors. Think through what is most important to your own situation and carefully consider how the combination of individual securities meet that criteria.
Shares your thoughts on income investing and email me at mark.lamonica1@morningstar.com
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What I’ve been eating
There is a degree of controversy over the origins of the French Dip. I wouldn’t let it keep you up at night. What I can say with certainty is there is nothing French about the sandwich. Two different establishments in Los Angeles – Philippe’s and Cole’s - claim to have invented the French Dip in the early 1900s.
The foundation of the sandwich is simple with roast beef in a baguette. The accompanying au jus is used to dip the sandwich. The Cole’s origin story involved a customer who had dental work and needed to soften up his meal with the au jus. At Philippe’s a sandwich was accidently dropped in the au jus and a hungry police officer said he would take it as is rather than wait for a new sandwich.
This version is from Continental in Newtown. They have a great sandwich line-up, but I was craving a French Dip. It was well worth the opportunity cost.
