Unconventional wisdom: Australia’s dividend drought and what income investors should do about it
Falling ETF distributions and shrinking dividend yields have raised concerns that the golden age of Australian income investing is ending.
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: Australia’s dividend drought and what income investors should do about it
EVENING was in the wood, louring with storm. A time of drought had sucked the weedy pool And baked the channels; birds had done with song. Thirst was a dream of fountains in the moon, Or willow-music blown across the water 5 Leisurely sliding on by weir and mill.
- Siegfried Sassoon
Australia has been a haven for income investors since the introduction of dividend imputation in 1987. For much of this time dividend yields far exceeded those available in most markets – and that is before accounting for franking credits.
Things haven’t been so great for income investors lately. This likely hit home for investors holding broad ASX index ETFs and income focused ETFs when June distributions were announced several weeks ago.
The June distribution for the Vanguard Australian Shares ETF (ASX: VAS) which tracks the ASX 300 dropped 25% from the previous year.
There were also significant distribution reductions for two popular income ETFs. The June distribution for the Vanguard Australian High Yield ETF (ASX: VHY) and the SPDR MSCI Australia Select High Dividend Yield ETF (ASX: SYI) were 80% and 50% lower, respectively.
Are the glory days for Australian dividends coming to an end? Is this a temporary phenomenon? Digging into the data uncovers the challenges and opportunities for income investors.
The macro environment for income investors
In early 2026 the income generated by Aussie shares dropped below two notable thresholds. According to the ATO the average annual yield for the All Ordinaries dipped below 3% while the average annual franking rebate yield fell to less than 1%.
The following chart using ATO data shows the dividend yield and franking rebate yield over the last ten years:
The overall yield suggests income investors are facing a more challenging environment than during the COVID period when many companies cut or suspended dividends. Just two years ago the All Ordinaries provided a grossed-up yield of 5.79%. Today it is 33% lower.
A dividend yield is influenced by market performance. All things being equal, a rising market will lower the dividend yield.
Yet in the case of the All Ordinaries returns have only partially influenced the dividend yield. In 2025 the All Ordinaries price return – not including dividends – was 7.55%. Year to date the index is slightly down. Dividend cuts are the primary culprit.
A top-heavy market with a poorly performing top
In a market capitalisation weighted index, the largest companies have an outsized influence on the overall market. In Australia the market is heavily concentrated with approximately 50% of the index in the top ten shares and 19% in BHP and CBA.
Unfortunately for income investors the ten largest companies are struggling to meaningfully growth their dividends. The following chart shows dividend growth since 2019:
Once conditions normalised following the pandemic in 2022 there has been little dividend growth for the largest companies.
Applying the constituent weights in the All Ordinaries to the dividend growth by individual companies provides additional context to the challenge faced by income investors.
Dividends are linked to earnings and as I outlined in a previous article the largest companies in Australia are struggling to grow. Given this lack of growth, returns for the largest companies in Australia have been surprisingly high.
This disconnect between earnings growth and returns raises some questions.
Is it because investors are increasingly turning to passive which disproportionately invests in large companies? Is it the size constraints on the large industry super funds which forces them to invest in the largest companies? Are higher valuations a rational response to the current environment?
Whatever the reason, the share prices of large companies are going up and their dividends aren’t growing or going down. That is why the current dividend yield is so low.
Unfortunately, according to our analysts things might be getting worse.
Income outlook for the Australian market
The following chart shows our analyst estimates for dividends over the next three years for the ten largest ASX shares:
As an income investor this chart doesn’t fill me with confidence that the dividend drought is over for the ASX. The forecasted drop in 2026 dividends from our analysts is already occurring. The weak interim dividends in the autumn may account for the reduced ETF distributions.
Looking at the dividend history and forward estimates suggests an issue with the two largest sectors in our local market – dividend growth from the banks is anemic and tracking below inflation while mining dividends are falling.
Mining shares have surged due to investor enthusiasm for copper…yet earnings are dropping. In the capital-intensive mining industry pivoting to new resources like copper or expanding / replacing current production costs a lot of money. That leaves less cash to pay dividends.
There are credible concerns about the levels of future earnings growth for the big four banks. Small changes in relative market share and cost cutting may help but ultimately their fortunes are tied to the mortgage market.
Given the changes in the tax system and the resulting 14% drop in home loan demand in June there are several headwinds for residential property loan growth. And if earnings don’t grow, dividends can’t grow.
Unless the banks and miners turn things around it is difficult to imagine a scenario where the income generated from a market-cap weighted index fund will grow meaningfully. Under this scenario income investors will have to turn elsewhere.
How should income investors react to the current environment?
In a concentrated market capitalisation weighted index like the All Ordinaries it is easy to confuse the ‘market’ with the performance of the average share. A market can rise significantly if the largest companies do well – even if most shares fall.
If you dig a little deeper into the Australian market this nuance is apparent. There are 124 Australian shares in our analyst coverage universe which have paid a dividend for the last decade.
The following chart shows the projected dividend growth from our analysts for the entire universe of shares under their coverage:
There is a disconnect between the dividend growth for the top ten shares and the rest of our analyst coverage. This doesn’t solve the income challenges faced by index investors but it does mean there are opportunities for income investors.
Final thoughts
I was perplexed when I got the notifications about June distributions for my ETFs. I wanted to find out why they were so low and after digging through the data I’ve made the case that structural issues are to blame – both market composition and the prospects for the top sectors.
But this isn’t a maths problem and there is no definitive answer. The current environment could also be the result of cyclical factors…and therefore temporary.
Most arguments for structural changes turn out to be wrong. And too often investors sabotage their outcomes by confusing temporary conditions with permanent ones.
If dividends bounce back because of higher commodity prices or higher bank profitability the historically low dividend yield will rise. Yields will also rise if an overvalued market falls.
ETF distributions can be fickle and may be impacted by timing and rebalancing which may obscure the role played by underlying dividend levels. Perhaps distribution levels will bounce back quickly.
But it is worth asking if what is currently happening is the market normalising. Was the ‘abnormal’ period simply a window of high commodity prices stemming from insatiable Chinese demand combined with rapid credit expansion?
If the days of buying an index fund and expecting high levels of income are over there are still opportunities for income investors.
There are several options that investors can consider in the current environment. In next week’s column I will walk through the pros and cons of four of them:
- Income ETFs or ETFs that avoid exposure to the largest companies
- Specialised ETFs that use strategies like covered calls to generate income
- Listed Investment Companies (LICs) that use active management and their structure to generate income
- Picking individual income shares
Share your thoughts and email me at mark.lamonica1@morningstar.com
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What I’ve been eating
I’ve got a deal with the Wallabies. I go to matches and they lose. It has been two years since I’ve seen them lose in Brisbane and a change of venue is always nice. Before heading to Suncorp I needed a full stomach since I knew I would be consuming copious amounts of XXXX to get through a defeat to the French. And I needed a nice bottle of wine to get through the XXXX.
I went to Julius at the start of Fish Lane. Pictured is the ‘Number 1’ pizza featuring basil and prosciutto. Luckily for me the kitchen put in a better performance than the Wallabies.
