Income ETFs are often marketed as an easy way to generate passive income, but not all dividend ETFs deliver the same results.

In this episode, Mark LaMonica and Shani Jayamanne compare some of Australia’s most popular income ETFs and explore a crucial investing question: should you prioritise higher yield today or income growth over time?

We start with a question that is easy to overlook: what are you actually trying to achieve with your income investments? Some investors want the highest possible income today, while others are more focused on growing their income over time and ensuring it keeps pace with inflation. The right strategy can depend on where you are in your investing journey and the role the investment plays in your broader portfolio.

We then put four Australian income ETFs under the microscope: RDV, SYI, IHD and VHY. Rather than simply comparing their yields, we look at how their distributions have grown over time and, crucially, how the rules used to construct each ETF influence what ends up in the portfolio.

The broader lesson is that ETFs may look simple, but once you move away from broad market indexes and into factor or income strategies, understanding the methodology becomes increasingly important. The index rules determine what you own, how the portfolio changes and ultimately how it behaves.

You can find the investment data for the ETFs below:

You can find more insights on income investing below:

Chart of the Week: CGT reform strengthens the case for dividend investing. Why dividend stocks are gaining an edge after tax reform.

12 picks for an income portfolio - Q2 2026 update. Passive income growth continues to exceed my target.

Yields take centre stage again. Stronger yields boost income appeal but tighter spreads and macro risks complicate outlook.

3 cheap fully franked stocks. Discounted Aussie shares that offer a tax rebate.

4 income investing mistakes. Avoiding these mistakes will increase your chances of success as an income investor.

You can find the transcript below:

Shani Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances, or needs.

Mark LaMonica: So, one more request for people, Shani. If you have read or listened to our book, a comment or a rating would be great in whatever platform you got the book or listened to it.

Jayamanne: And if you have a Spotify Premium subscription, it is now included in your subscription. And you can use a credit on Audible to access our book as well.

LaMonica: All right. Well, let’s get into today’s episode. We’ve been on a bit of an ETF tear lately, Shani, and today is no different. We are going to talk about income ETFs. And we hope this is interesting because we know this is a common goal for a lot of investors.

Jayamanne: But before we do get into the ETFs, we’re going to talk a little bit about goals. Any investment is just a means to an end. So, if you don’t know what you’re trying to accomplish, you can’t possibly pick which investment will give you the best chance of achieving your goals. And Mark, since you are a vocal income investor, why don’t you walk us through it?

LaMonica: Okay. Well, often any sort of income goal comes down to that trade-off between growing dividends and high dividends. And when we overlay this with investor goals, so on one side of the spectrum, there are investors that are interested in growing their stream of income. So many investors just want that income to actually exceed inflation. So, it actually is growing on a real purchasing power perspective. And that, of course, is attractive because we’re all investing so that we can spend money later. And we want to be able to buy things that we want to buy in the future. So really what this comes down to is whether you are more interested in spending the money now, where you may go for a high yield strategy, or if you’re more interested in growing that income stream for some time in the future.

Jayamanne: Okay. So maybe you can talk a little bit about the other side of this trade-off. So high current income.

LaMonica: Yeah, well, I think for some income investors, getting the highest yield possible is the right way to go. So, if you have a limited amount of capital to invest and you want the biggest bang for your buck and generate as much income as possible, you might go down this route.

Jayamanne: And for most income investors, this isn’t an absolute trade-off. It is about tilting your portfolio in a certain direction, either more growth or higher yield. So, this isn’t all or nothing. It’s about finding balance.

LaMonica: Exactly. And it’s important to say that this balance can shift over time. So typically, if you are younger, like Shani, you are more interested in growing that income. If you’re older, you might want to tilt towards higher current yields. And this is taking a portfolio approach. So different investments you hold can play different roles in your portfolio. But you need to understand where you want to tilt that overall portfolio.

Jayamanne: And it is worth exploring why this is a trade-off. So, a company can’t grow dividends over the long term unless earnings grow. And to grow earnings takes investments. This could be more money directed towards marketing, expanding capacity, acquiring companies, or paying off debt. If not enough is invested in growing earnings, the dividends simply won’t grow. But the more a company invests, the less money there is to pay dividends.

LaMonica: That’s right, Shani. And so, if you invest more of your earnings in growth, as you said, there’s less left over to pay dividends. But the other ways that companies raise money also lowers their ability to pay dividends. So, if debt is raised, more is paid in interest, which means less cash to pay dividends. If more shares are issued to pay for that growth, the share count will go up, which means dividends per share is more expensive for a company to maintain.

Jayamanne: And these decisions made by management are critical. The investments need to be effective, so it is a constant balance in capital allocation decisions to invest wisely.

LaMonica: And in some ways, we can see this trade-off between the Aussie market and the US market. So, the Australian market has historically had higher dividends, which of course are encouraged by franking credits and now the changes to CGT. But for that reason, and also the local industry mix we have here, growth has traditionally been a lot slower in Australia. In the US, dividends are lower. A smaller percentage of profits are paid out in them, but growth has been a lot higher. So, at a high level, these two markets are illustrative of this trade-off that we’re talking about.

Jayamanne: And we’ll look at income ETFs with this trade-off in mind. But we would encourage anyone interested in income investing to think about where you fall on the spectrum and when evaluating an ETF, think about what role it’s going to play in your portfolio.

LaMonica: And the key to picking any ETF is figuring out how securities are selected for that ETF. So, remember, an ETF is not an investment strategy. It’s not an asset class, and it shouldn’t be confused with what’s actually on the label. So, for income ETFs, the first thing we’re going to look at is how they have delivered against those two criteria for income investors. So, dividend growth and dividend yield.

Jayamanne: And we’re going to look at several ETFs today. The first is the Russell Investments High Dividend Australian Shares ETF with a ticker symbol RDV. The next is State Street SPDR MSCI Australian High Dividend Yield ETF with the ticker symbol SYI, then iShares S&P/ASX Dividend Opportunities ESG ETF with the ticker symbol IHD. And then finally the Vanguard Australian Shares High Yield ETF with the ticket symbol VHY.

LaMonica: Thank you for going through that. I know you blame me that I make you always say all of the names, but I’m going to say a couple as well. So those are obviously income ETFs, but we need to compare them to non-income ETFs to make sure they’re actually giving you extra income. So, we are going to baseline off of two Aussie ETFs. So, the Vanguard Australian Shares ETF with that ticker symbol VAS, which is probably very familiar to people, and the VanEck Australian Equal Weighted ETF with the ticker symbol MVW.

Jayamanne: First up is dividend yield, which fulfills one of those investor goals Mark went through at the beginning of the podcast. These yields are based on last year’s distributions and the price as of 6th July. RDV is yielding 5.49%. SYI is yielding 7.57%. IHD is 4.05% and VHY 3.6%.

LaMonica: Okay. So, we’re going to compare those yields to the baseline. So first we’ll do Vanguard ASX 300 ETF, VAS, and of course, that Equal Weighted ETF, MVW. So, VAS has a 12-month distribution yield of 2.97%. MVW is 3.43%. So, I think the good news is that all of these income ETFs do have a higher yield than those two different ways we can split up the index in Australia. But I will say there is a very large range of yields with those income ETFs. So, at the bottom is VHY, the Vanguard offering, at 3.60%. And at the top is SYI with 7.57%

Jayamanne: All right. So why don’t we shift to growth? Before going through the growth, we need some context. In the decade since 2016, cumulative inflation has been 36%. That means that growth higher than 36% means your real or inflation-adjusted income has increased. If it is less, you have less purchasing power.

LaMonica: Okay. So, let’s go through these. The cumulative growth in income over the decade in distributions was 17.27% for RDV, 6.63% for IHD, 78.50% for VHY, and 190.33% for SYI. And then if we look at our baseline, 10.72% for VAS and 268.98% for MVW.

Jayamanne: And these are big differences. RDV and IHD were well under the inflation growth rate. VHY and SYI are well above, although there is a big gap between SYI’s 190% growth and VHY’s 78% growth.

LaMonica: Yeah. And the overall index, ASX 300, VAS, only increased distributions at a third of the rate of overall inflation, which is not good. But strangely enough, the highest growth of all of the ETFs was MVW, something that’s not even focused on dividends.

Jayamanne: So, what are your thoughts, Mark?

LaMonica: Okay. Well, we’ll get into the dividend ETFs. But when we’re looking at VAS and MVW, there are two things that we can infer from these vast differences in distribution growth. The first is that a distribution from an ETF is not just dividends. It is also capital gains. And it makes sense that MVY has higher capital gains because to keep that ETF equal weighted requires rebalancing, that rebalancing generally causes capital gains, which then get distributed as part of that distribution. But that doesn’t explain the entire difference because it’s very large. It’s just way too large just for capital gain. So, the second thing it tells us is that the dividend growth in the Aussie market is happening at a faster rate with mid-cap companies than large cap companies, which of course dominate the market cap weighted index like VAS tracks.

Jayamanne: And in a separate article, you looked at the growth in individual companies and how that played out. And one of the big culprits was the big four banks. So, NAB and Westpac’s dividends shrank over the decade, and ANZ was just marginally higher. CBA wasn’t much better.

LaMonica: Yeah. And we’ve been talking a lot about real and comparing it to inflation. This is just nominal. The dividends have gone down for NAB and Westpac. So, we do need to think about how that’s impacted these ETFs that hold so many of these banks.

But let’s turn our attention to the dividend ETFs that we mentioned. So, there is one clear winner if we look at the combination of yield and growth. So, SYI at least appears to be that clear winner. It is the highest yield and the highest growth. So, it seems to be checking both of those boxes, at least historically. But we do want to dig in a bit because the only thing that matters, Shani, is what happens in the future. So, let’s start with SYI. How do they select shares for that ETF?

Jayamanne: All right. So, the ETF tracks an index called the MSCI Australia Select High Dividend Yield Index. The index starts with the MSCI Australian Shares Investable Market Index, which takes the largest 239 shares in Australia. A variety of screens are applied to the overall index. The first is a screen that applies a minimum cutoff of return on equity, debt to equity, and earnings volatility.

LaMonica: And these are all related to dividends, even if they don’t seem like it. So, return on equity measures how efficiently a company uses shareholder money to generate high returns. So, if you are effectively investing money in the business, that is one driver of earnings growth. Debt to equity is a measure of leverage in the business. As we said before, the more debt a company has, the higher the interest expenses, and that reduces flexibility, which you can use to pay dividends. So, if anything happens to that debt, if interest rates go up, that could endanger the dividend. Finally, as we said, dividends come from earnings, and the more earnings fluctuate, the more dividends will fluctuate.

Jayamanne: And as you can imagine, there are also some screens directly related to dividends. To make the final cuts, securities must carry a dividend yield greater than the broader MSCI Australian Shares Investable Market Index based on a combination of historical dividend yields and forward-looking one-year dividend yields. Finally, there is a cap of 10% on any one holding to reduce concentration with weightings based on market cap or how large the companies are.

LaMonica: So, the ETF typically holds around 60 shares and it’s rebalanced twice a year. So, it’s really important to understand those rules. But then you also want to say, hey, what is the impact of these rules by looking at what the ETF currently holds. And in this case, SYI’s portfolio looks fairly different than the overall market in three different categories. The ETF is very underweight basic materials. So that’s the miners. The overall index has close to 20% in basic materials. The ETF only has 8% in basic materials. The two sectors that the ETF is overweight to make up for this, financial services, where 50% is allocated compared to 35% in the index, and then healthcare, where 10% is allocated in the ETF versus 5% in the index.

Jayamanne: So, let’s move on to the other ETF that has performed well from a growth perspective, and that is VHY. The caveat being that this ETF has the lowest yield of the four dividend ETFs that we looked at here. So why don’t you start with the ETF and then we can get your thoughts on the low yield, Mark?

LaMonica: Okay. So VHY tracks something called the FTSE Australia High Dividend Index. The index ranks all dividend-paying stocks in the FTSE Australia 200, excluding property trusts. And it does this based on their one-year forward dividend yield from the institutional brokers estimate system. So, the index takes these forward estimates of dividends and then selects the ones with the highest estimate and then weights the shares using their market cap. So, there are concentration limits, once again. So, it caps industry exposure at 40% and individual positions at 10%.

Jayamanne: Like SYI, this Vanguard ETF also rebalances twice a year based on the criteria. The actual holdings look quite different from SYI. In this case, the ETF is overweight basic material shares with a 26% allocation versus close to 20% in the index and overweight energy shares. Like SYI, VHY has more allocated to financial services than the index, but at a lower rate of 37.5%.

LaMonica: And then as we mentioned at the beginning, Shani, the yield is much lower. And a lot of that has to do with the recently declared distributions at the end of June 2026. So, across the board in Australia – I’m not sure how much people notice this – but across the board distributions were lower in June than they had been the previous year. So, all of this hurts the overall distribution yield since we are looking at the last 12 months.

So, to give me some examples. So, the ASX 300 distribution for VAS, in June, it went from $0.65 in 2025 to roughly $0.49 in 2026. So that’s 25% lower. For SYI, the distribution dropped from $2.65 to $1.31, which is 50% lower. VHY dropped from $2 to $0.40, which is 80% lower. So that larger drop than both the market and SYI is why VHY has such a meaningfully lower yield.

Jayamanne: So, what do you think about that?

LaMonica: Well, I think we need to look at this against the backdrop of the overall market. So, mining and energy dividends have been relatively weak over the last few years with drops continuing into this year. So more than anything, I think we are seeing this play out in the overall market, but this is especially impacting VHY given higher exposures to mining and energy. So, this obviously isn’t great for all the income investors, especially for people who hold VHY like me.

So not a great time, but VHY just went through rebalancing. So, it will be interesting to see, and we should get the new portfolio in August, it should be interesting to see the differences in the portfolio. Since forward dividend estimates are used, it will be interesting to see how these historic dividends and future prospective dividends, what that interaction is.

Jayamanne: And if we look at SYI, we can see how some of the additional non-dividend screens lower the exposure to mining, especially that screen around earnings volatility, as cyclical companies like miners typically have high levels of earnings volatility.

LaMonica: And we have been very focused on income today, Shani, because obviously we are doing a podcast on income ETFs. But it is also interesting to take a look at the relative performance of these ETFs. So VHY has outperformed SYI in terms of return. So, over the last year, VHY is up a bit more than 16%. SYI is up a little more than 14%. Over the past five years, that outperformance continues. VHY is up 10.97% a year, and SYI is up 9.6% a year.

Jayamanne: One other area that might be hurting both ETFs is the market cap weighting. As we previously pointed out, the fastest growing incomes come from a non-income ETF with the equal weighted MVW. So, any thoughts on that one, Mark?

LaMonica: Yeah, I mean, it is full disclosure. That’s another ETF that I personally own. We’ve talked about that on previous episodes. And I think I’ve been quite vocal saying I don’t think the prospects for large companies in Australia are great. And I think that’s even more the case now with some of those changes that were enacted by the government to slow housing price growth. So that should impact banks. So, if housing prices come down, or even if they grow less, that means loans won’t grow as much or potentially will come down.

And I think in particular, those investment property loans that carry higher interest rates than regular mortgages for your own property that you live in, that could play out for the banks as well. So, I think we have really slow historic earnings growth for the largest companies in Australia. And yeah, I don’t think that that’s going to improve. And if you don’t grow your earnings, you can’t grow your dividends.

Jayamanne: And another interesting thing is that slow earnings growth has not had much of an impact on returns. VAS has outperformed MVW over one, three and five years. Market cap-weighted index outperformance largely comes down to increases in valuation levels for large companies, which have gone up in Australia despite not much earnings growth.

LaMonica: Yeah, and one reason that’s often cited for this is, you have all these giant superfunds, and then you have the growth of passives. So as industry super funds have gotten bigger, they’ve been forced to dump more money into the larger shares, or they’ve switched to more of a passive strategy, which automatically puts more money into the largest companies. So that impact is compounded by all the other passive investors out there that put their money in index funds and ETFs, and then most of that money goes to the largest shares.

Jayamanne: And a lot going on in markets as always, and it just shows all the moving parts that impact markets and the things investors have to contend with when trying to achieve a specific goal, like increasing income.

LaMonica: And I do think that this is one of the probably underappreciated challenging aspects of using ETFs as an income investor. So, things are certainly more straightforward if you have an individual share. It’s just easier for investor to understand why a dividend goes up or down with that individual share. So, with ETFs, it takes looking at the criteria, how it might impact portfolio construction, and then those overall trends that are occurring across different sectors, which are impacting income growth.

Jayamanne: Along with those challenges are advantages in terms of gaining diversification in a single trade. But as we’ve always said on this podcast, ETFs may get sold as simple, but when you deviate from the broad-based index ETFs like VAS, inter factor, and thematic ETFs, things become a little bit trickier.

LaMonica: That’s of course right, Shani. And I think it’s why we both advocate and we both think it’s so important for investors to understand how these factor and thematic indexes are constructed, and then to spend some time reflecting on the impact of those methodologies on what actually gets included in a portfolio. So that’s a process we went through today.

So, we’re going to leave this podcast here. We’re not going to go into RGV and IHD because frankly they’re not performing great from an income perspective. So, we thought it would be good to concentrate on the ETFs that have been more successful. For those investors that are hungry for high yields, maybe in the future, we’ll keep this ETF thing going. And maybe in the future we’ll do an upcoming podcast on some of the yield max ETFs that are using covered call strategy. So, we’ll put that one on the schedule.

But for now, we’ll end this podcast. Thank you very much for listening. And if you do have the time and interest to put a comment or rating for our book, we would really appreciate it.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)

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