In this episode of Investing Compass, Mark and Shani explore what they call the ASX’s ‘dividend champions’ - shares, ETFs and LICs that have consistently delivered strong income outcomes for investors over the past decade. The discussion goes beyond headline dividend yields to focus on the characteristics that have historically supported sustainable and growing income streams.

The episode examines how investors should think about dividend investing in practice, including the trade-offs between income, diversification and long-term total returns. Mark and Shani compare individual ASX shares with dividend-focused ETFs and listed investment companies (LICs), highlighting the different ways investors can build passive income portfolios depending on their goals and preferences.

A key theme throughout the conversation is that high yields alone are not enough. The episode emphasises the importance of understanding where dividends come from, whether they are sustainable, and how different investment structures manage income generation over time. Investors are also encouraged to think about the role dividends play within a broader financial plan, rather than treating yield as the sole measure of investment success.

You can find Mark’s stock article here, and ETF and LIC article here.

You can find the transcript below:

Mark LaMonica: Thanks to PocketSmith for sponsoring today’s episode. PocketSmith tracks your spending, income, and investments all in one place so you get a holistic view of your finances. PocketSmith has a special deal for Investing Compass listeners. Get 50% off on your first two months of the PocketSmith Foundation or Flourish Plans. To get your deal, go to pocketsmith.com/investingcompass, or find the link in the podcast notes.

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.

LaMonica: Today, Shani, we’re going to talk about one of my favorite topics and that’s income investing.

Jayamanne: Is this in general or just like from a work sense or…?

LaMonica: Just from a work sense.

Jayamanne: Okay.

LaMonica: But before that, we’re going to talk about one of your favorite topics, which is relevant and that is the budgets. So, you spent Tuesday night watching the budget.

Jayamanne: I did, yeah. I had an interview at 8:30 the next day.

LaMonica: Yeah, so it was partially a work thing, but you used to have budget parties.

Jayamanne: I did, yeah. That was back in my uni days and maybe a little bit after.

LaMonica: Yeah, I knew you when you had those budget parties, but the budget is obviously front of mind for a lot of people. So, we do want to talk about it for a second. So, I’m in the process of writing an article, which will be out on our website by the time this episode is released. But we’ll just summarize briefly what happened. I’m sure most people have heard this, but there’s been some big changes to capital gains tax. So, discounts used to be, if you held something for more than a year, used to be a 50% discount. That has now changed. So that is going to be based on inflation. And in almost any inflation scenario where Australia does not become Germany in the 1920s, you will be paying a significant amount more tax on capital gains. So that’s one thing that I think investors are concerned about.

The other change to capital gains is a good strategy used to be waiting until you’re retired to start realizing some of those gains because you’re in a lower marginal tax rate, potentially in a zero marginal tax rate. So that has gone away. It’s now 30% minimum. And I’m trying to go through and what I’m doing in this article is going through some of the implications. And some of them are asset placement – where do you want to hold certain types of assets, whether it’s in super, whether it’s outside of super. And then the one related to today is, of course, income. So actually, income is treated a lot better if you are getting franked income. It’s treated a lot better than capital gains. So that’s something to think about as well.

But, Shani, you mentioned that you did have that interview. And you were talking about just investing in general. I think some people are discouraged by this, investors are discouraged by this. But maybe do you want to talk a little bit about investing in general?

Jayamanne: Yeah, I think that the changes to CGT were really to help with our housing crisis. But ultimately, the CGT changes have been a punch in the gut for equity investors as well, especially that minimum 30% minimum charge. But important, I think, though, is remembering that investors should avoid making investment decisions purely for tax reasons. And tax does matter, but it’s only one component of your total return. And it should be considered on a total return basis.

So, incorporating capital growth, income generation, risk, volatility, liquidity, all of those considerations when you pick up an investment and, of course, how it aligns to your goals and your time horizon. And this is just a perfect example of how if you are a long-term investor, legislation can change and it will change over that time horizon and tax policy will evolve alongside governments and economic conditions and fiscal priorities. So, I think, as investors, our role is to not build portfolios around today’s tax settings alone, but really to construct resilient portfolios that will survive these time horizons. And we are going back to a model that existed back in 1999. It is something that we’ve had before, but it’s something that can and will change over the next 40, 50 years.

LaMonica: Yeah. And I think one important point, because I know that this is discouraging and obviously, like, listen, this is going to make it harder to achieve your goals, obviously, the higher taxes are. But yeah, I think, I am hearing some things about, oh, is it even worthwhile investing anymore? And to me, yeah, the case is the same. So yes, you are never going to achieve your goal if you stick your money in cash. And so, yes, you will be paying higher taxes, but you also obviously get a significantly higher return over the long run investing in things like shares. So anyway, check out my article. There will be some more specific points in there if I ever finish it. But…

Jayamanne: Well, you’ve promised to people now, Mark.

LaMonica: I know, I know, I’m locked in. But let’s get into today’s episode. As I said, it’s somewhat related. It’s on income and it’s based on two articles that I wrote. So, you get two for the price of one today, plus our little discussion about tax changes. And these articles that I wrote looked at historical income data on Australian shares, ETFs and LICs.

Jayamanne: So, do you want to maybe start by talking about where you came up with the idea for the article, Mark?

LaMonica: Yeah. Well, as you’re very aware, Shani, it is hard to come up with these topics continually week after week after week. And one of the great things is people occasionally do write in with ideas, which I think both of us find very helpful. And this was actually a question that came in from somebody, and the question was asking – it was looking at the standard income investing advice that you get in the U.S. And that advice is to avoid dividend cuts at all costs and asking how to apply that to Australia.

Jayamanne: And a good deal of investing advice comes from the U.S. And sometimes the advice isn’t relevant to the Australian market. And this is one of those cases.

LaMonica: It is one of those cases. And I’ll get into some of the details here. But I think this is a case where you should follow the spirit of the guidance, not necessarily the exact rule. And this is one of the reasons that we talk about this a lot, why it’s so important to be an informed investor and really understand what you’re trying to accomplish. Because then it allows you to adjust advice that you get, or in some cases just ignore that advice because it doesn’t fit into your situation. So, with all that out of the way, why don’t you talk about the differences between dividends in the U.S. and Australia?

Jayamanne: I feel like you’re much better placed for this, Mark. But in the U.S., a dividend cut is a last resort for a company because investors perceive this as an indication that things are going very wrong for a company. So, what you typically get from income shares in the U.S. is a focus on growing dividends every year and at the very least, never cutting them. So, U.S. income investors typically gravitate to dividend kings and aristocrats, which have long histories of annual dividend increases.

LaMonica: And this all sounds great and something I am drawn to the dividend kings and aristocrats as well. But because U.S. companies are focused on not cutting dividends, the payout rate or the amount of earnings that are paid out in dividends is typically lower. So that gives a company more of a buffer to maintain that dividend in case something impacts their earnings. And the dividend yield on the S&P 500 is much lower than it is in Australia because of that lower payout rate and the fact that many companies, especially in the tech space, aren’t overly concerned with dividends or actively avoid them. So now maybe you’re better placed for this. Why don’t you contrast that with Australia?

Jayamanne: Yeah. So, in Australia, companies typically pay out more of their earnings in dividends, which means yields are higher. There also isn’t this stigma around dividend cuts. And since many companies in Australia in the mining and banking space are cyclical dividends, they tend to rise and fall as earnings rise and fall.

LaMonica: All right. The brief summary is that dividends typically grow faster and more consistently in the U.S. than Australia. But in Australia, dividend yields are typically higher. And of course, you get the benefit of franking credits.

Jayamanne: So, what’s better, Mark?

LaMonica: Well, you probably know my answer. And what works best is obviously based on what you’re trying to accomplish. But you also don’t just have to choose one. So, investments are just tools to get the job done and you can use multiple tools in your portfolio. So, I think the best approach and what I do is mixing and matching and keeping those different characteristics in mind.

Jayamanne: All right. So, let’s get back to the premise of your articles. You wanted to apply the spirit of the U.S. advice, but about avoiding dividend cuts without getting too caught up in the rule. How do you interpret this rule for an Australian context?

LaMonica: Okay. So, I think this is where it’s going back and thinking about what income investors are trying to accomplish. And the bare minimum goal for all income investors, or at least it should be, is to grow passive income at a rate that’s higher than inflation. So, some will tilt more towards growth in income and some more towards current yield. But if you can’t grow your income as fast as inflation, then you are actually getting poorer every year. And I don’t think that’s anyone’s goal.

Jayamanne: No, Mark. But you looked at 10 years of data in your articles and ran shares, ETFs and LICs through a series of screens to see which ones came out the other side. So given your focus on inflation, I assume that was one of the screens.

LaMonica: Exactly. So, I looked at a 10-year period. So, I was searching for what I called Aussie dividend champions. So, I compared 2016 dividends to 2025 dividends. I did that for each of the 214 ASX-listed shares in Morningstar’s coverage universe. And I picked out 10 large income-focused ETFs and LICs. So higher dividends are great, as I said, but the goal is to grow passive income at a pace faster than inflation. So, since 2016, inflation has cumulatively increased 36%. So, I use that as the initial cutoff. And using that as a cutoff, 47 companies and three ETFs have a 2025 dividend that was at least 36% higher than 2016.

Jayamanne: All right. And then what’s step two?

LaMonica: All right. So, I wanted to account for the variability in year-to-year dividends in Australia, but make sure that they were consistently moving higher. So even if they bounced around year-to-year, we wanted that trajectory to move higher. So, to do this, I took the average annual dividend over the past 10 years, and I compared that to the 2025 dividend. So again, I used a 36% cutoff for inclusion onto my list. That is a high hurdle rate, but we’re trying to find the dividend champions here. So, we do want high criteria. But what this does is it further reinforces that only shares that have grown dividends at rates comfortably exceeding inflation will be included. That cut the list down. So now there are 27 shares and three ETFs.

Jayamanne: Okay. So, this is where you ended the screens for ETFs and LICs, but you still have a couple of more steps for shares. So, what are those?

LaMonica: Exactly. So, I looked at Morningstar Research, and obviously, like we are looking at the past, we’re assuming that that will continue in the future, but I also want to see what our analysts thought. So, I looked at our analysts’ estimates for dividends over the next two years for each of those 27 remaining dividend champion candidates. I allowed for estimates of lower dividends, but I had a cutoff. So, no companies that our analysts projected the dividend was going to drop more than 10% from 2025 levels. And there are now 23 companies on the list.

And then the final step, I wanted to look at companies that didn’t pay a dividend for any single year during that 10-year period. I’m trying to maintain, as I said, high standards for my dividend champions. So, I removed three companies from that list. Incidentally, those are Santos, Qantas, and Origin. So, in all those cases, those companies did not pay a dividend for a year during that 10-year period. So now we have my dividend champions. So, there were 20 of them, and then three dividend champion ETFs.

Jayamanne: All right. So, we’ll put a link to the full list of shares in your article, but let’s talk through some of the lessons you learned.

LaMonica: Okay. Well, I think the first lesson, as people may have figured out as I slowly went through and cut companies out, is that the overall Australian market has not done well against my criteria. So, Australia has always been known as a great place for dividends, but there are signs for concerns. So, I wanted to look at that overall market.

So, I looked at Vanguard Australian Shares ETF. So that is an ETF that tracks ASX 300. And the overall distribution growth for Vanguard Australian shares between 2016 and 2025 was only 10.72%. So once again, maybe that looks good in isolation, but that’s a third, less than a third of inflation, which means that the purchasing power of those distributions has gone meaningfully lower during that time period. There were also very large variations in the year-to-year distributions. Now part of that was because of COVID, but the average distribution over that decade was higher than the one in 2025, which I thought was interesting as well.

Jayamanne: And perhaps this makes sense. The largest Australian companies are struggling to grow their dividends, which impacts a market cap weighted index. And this was apparent when you did examine individual Australian shares. So, none of the big four banks or large miners met your criteria.

LaMonica: Yeah. And I think this is really where in this market cap weighted index is looking under the hood and you can start to see some of the challenges. So, the dividend payout rate in Australia has been steadily dropping over the last decade. So going into 2016, Australian companies were paying out nearly 80% of their earnings. I will say that was a historic high. The rate dropped to 63% in 2025, and that is below the average of 67% in the decade prior to 2016. So, this brought yields down, and they are below their historic average.

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Jayamanne: So, let’s dig into the banks a bit more since many income investors do gravitate towards them. How did each of them perform?

LaMonica: Yeah, I mean, maybe they shouldn’t, I think is a lesson. So, NAB and Westpac had lower dividends in 2025 than 2016. ANZ’s dividend was marginally higher. So, shareholders in all three have meaningfully less income when we account for inflation. So, CBA’s 2025 dividend exceeded that 36% threshold over 2016. But the average dividend in the decade didn’t meet the threshold when compared to 2025. So at least CBA passed that first step.

And I think if we take a step back, the growth prospects for banks are fairly limited. So, it’s a stable competitive environment. So, they’re not really taking market share. It’s dominated by the largest players. They are the largest players. So, it isn’t actually surprising that they failed to grow dividends at a rate higher than inflation, at least three out of four.

Jayamanne: All right. So, what about the miners?

LaMonica: Okay, three big miners. So, BHP, Fortescue and Rio, they grew their dividends at a high rate when we compared 2025 to 2016. But there were huge fluctuations in that 10-year period. And that isn’t exactly surprising, right? So, miners are price takers. So, they don’t generally have any control over price. They’re at the whim of commodity prices, which are really, really cyclical. So mining is also a really capital-intensive business. So, replacing reserves, as you deplete those reserves, replacing those reserves is really expensive. It’s either developing new mines or going out and acquiring new mines.

Jayamanne: And three ETFs met your criteria. Do you want to talk a little bit about those ones?

LaMonica: Yes. So, the three ETFs were VanEck’s Australian Equal Weighted ETF, MVW, something we talk about a lot here; Vanguard Australian Shares High Yield ETF, VHY; and State Street Australian High Yield ETF, SYI. So, two of those ETFs are income ETFs, and they are certainly delivering on their goal. I think MVW is interesting because while the ASX 300 ETF, that Vanguard Australian Shares ETF, that income grew at a rate far slower than inflation, the Equal Weighted ETF did well.

Jayamanne: And I know you own MVW, Mark. So, did that validate your opinion at all?

LaMonica: Yeah. I mean, it’s nice that I was right about something for once. I didn’t own it during that whole period. I think I’ve owned it for like five years. But really, to answer that question, you’ll have to come back and ask me in 10 years if I’m still alive, Shani. But I think that, what I talked through, I don’t personally have a lot of confidence in some of these big companies, the banks and the miners, to deliver that dividend growth, and I talked about some of the reasons why. But I think that the Equal Weighted Index, I think some of the smaller companies do have a better opportunity to consistently grow dividends. So that’s one side of things. And that’s why I think it’s an attractive investment from an income investor perspective.

But I will say that the portfolio turnover of MVW is much higher. It’s 35%. And they need to do that so that they can keep it equal weighted. And so that does generate capital gains. The capital gains get added to those distributions. But it doesn’t tell the whole story. The dividend growth has still been stronger for those smaller companies. And the question, of course, is will this continue in the future?

Jayamanne: Yeah. So, for more detail, the list of shares and a few additional lessons, you can read Mark’s articles in the show notes. But is there anything that you wanted to close out on?

LaMonica: I mean, I think just the same advice that we started this with both on the discussion about the changes in tax and how you put together an income portfolio is just focus on what you’re trying to accomplish. So, we do hear a lot about how great the Australian market is for dividends and how great franking credits are. And certainly, there’s truth in that. But at a certain point, if there’s no dividend growth, you are going to start to fall behind inflation.

So just be selective and deliberate about what you are trying to accomplish and how you’re doing that in your portfolio.

All right, Shani, we made it, another episode. Thank you all for listening. We 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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