9 ETFs to tap the ASX's income hotspots

A statistic from Matthew Haupt's 2025 outlook caught our team's attention - the dividend yield of the Commonwealth Bank (3%) is now less than the yield on a 12-month term deposit (4.3%). What's more amazing, that latter number has been declining just simply because the next move for the Reserve Bank will almost certainly be a cut to the cash rate rather than a hike. You can see how each of the Big Four (plus Macquarie and Bendigo Bank's) dividend yields stack up against their 12-month term deposit rates.

Source: Market Index, bank websites. Term Deposit Rates are the highest possible quoted rate over a 12-month time horizon and are the "at maturity" rates.

Unless you're buying ANZ or Westpac shares, investing in a respective bank's term deposit is as good if not better than investing in their shares. More broadly, the dividend yield of the Australian market is now just 3.8%, a long way from the 5.3% peak of 2022. Markets like Hong Kong, Singapore, and Indonesia now pay higher dividend yields than we do.

So, given Australia's high dividend paying culture is (so often) a product of the Big Four banks and Big Three miners, is Australia slowly losing its "income investors' paradise" reputation? Or is this just a cyclical blip in an otherwise fantastic structural story? Given 19% of you told our Outlook Series survey that sustaining a reasonable income through investing is an important goal for you in 2025, this is going to be a very pertinent wire.

Some charts for income investors to consider

Before we cut to the expert analysis, it's worth noting that the earnings and dividend yields of the All Ordinaries closely track each other. 

The earnings yield has declined for the better part of a year and for most of the last three years, the index's dividend payout ratio has been consistently below the index's 10-year average. Yet, the P/E ratio of the All Ordinaries continues to remain at around 27x. That's substantially higher than the long-run average of 17x - and it keeps climbing. In other words, earnings are declining, dividend payout ratios are on the way down but the prices keep going up.

And in case you think this is just a two-sector phenomenon, most of the major sectors of the Australian share market have seen flat or declining dividend yields since 2021. This decline in dividend yields also lines up with a cyclical decline in earnings yields. The earnings yield sits below 4%, according to Market Index's data.

And while the RBA's commencement of interest rate cuts may help, FTSE Russell's analysis reminds us that the banks would be starting to increase their dividend payouts from an unusually high place.

"We note that if financials’ stock prices rally on the back of these [rate cut] expectations, then higher valuations may temporarily offset the effect of these higher payout ratios, temporarily lowering dividend yields in the process," analysts wrote back in September 2024.

Is Australia losing its high yield reputation?

To help answer this question as well as to find out what other options are available for income investors, we're joined by one of the country's leading financial advisors - Sarah King, Head of Client Care & Advice at Stockspot. 

King told me she is not sure whether Australia's income challenges are structural but that, for the moment, the going is tough and that investors who crave the big yields they used to may need a change in mindset.

"I think it's very much a product of the environment that we're in this period of extended higher inflation and higher interest rates," King said.

"I still speak to a lot of clients who are looking to chase income. But what they're having to do to get that higher income is to chase things like private credit [or invest in] different types of bonds with different credit ratings and that actually means they're having to take more risks to get that higher income," she added. 

"When we see rates come down, it'll be interesting to see if there are higher payouts."

What options do income investors have away from the Big Seven stocks?

As an advisor who deals exclusively in ETFs, she deals with a lot of clients who come to them with questions about to get a higher yield on a specific stock or basket of stocks. To change their mindset, she simply goes back to one word: diversification.

"If you're just being so heavily concentrated to just a few stocks, you're increasing your risk, you're not diversified, and you could be losing out on so many other income opportunities from other asset classes in a diversified portfolio," she said.

She also encourages clients to look at the total return of a portfolio:

"You get the income, but it's also an opportunity to tap into some of that capital growth ... If you're just focusing on income, you can often be taxed on it and it won't help you keep up with inflation," she added.

So what ETFs do King and her team look at to get that enhanced income? 

First and foremost, she starts with the basic building blocks of the Vanguard Australian Shares Index ETF (ASX: VAS), iShares MSCI Emerging Markets ETF (ASX: IEM), iShares Global 100 ETF (ASX: IOO), and the iShares Composite Bond ETF (ASX: IAF). Together, these products give you a starting yield of 3-4%. 

Beyond that, she offers the following ideas:

• Vanguard Australian Shares High Yield ETF (ASX: VHY), which seeks to track the return of the FTSE Australia High Dividend Yield Index and has a current running dividend yield of 5.15%. 
• Vanguard Australian Property Securities Index ETF (ASX: VAP), which tracks the returns of the S&P/ASX 300 A-REIT Index and has a current running dividend yield of 3.56%. If interest rates do come down this year, that will also be good news for A-REIT stock valuations.
• VanEck FTSE Global Infrastructure (Hedged) ETF (ASX: IFRA), which gives investors access to a range of global infrastructure stocks and is available in hedged and unhedged form. 
• SPDR S&P Global Dividend Fund (ASX: WDIV) which seeks to track the S&P Global Dividend Aristocrats Index (in AUD terms)
• And for the really short term minded, the Betashares Australian High Interest Cash ETF (ASX: AAA), which has a current 12-month distribution yield of 4.44%. 

More broadly, she doesn't recommend investors necessarily tap private credit. As appealing as its yields may be, there are catches.

"Usually, they are are taking on more risk around credit quality and accessibility. Also, some schemes have lock-ins. There's a lot of it we wouldn’t recommend," she said.

Finally, she spoke to the need of staying the course. If King is right and this dip is cyclical rather than structural, then only reviewing your big picture strategy every three to four years can make a big difference.

"We last changed our SAA [strategic asset allocation] in February 2021 where we reduced the allocation to bonds, increased it to gold and emerging market shares which has served our clients well during this sustained period of high rates and inflation, and geopolitical instability. We also use optimised rebalancing to help look for more frequent opportunities to rebalance client portfolios if there is drift," King added.