Do Australian Dividend ETFs Beat US Dividend ETFs?

Summary

In this comparison of dividend-focused ETFs, the video contrasts the Vanguard Australian High Yield ETF (VHY) and Schwab US Dividend Equity ETF (SCD). While VHY offers higher yields (5.5% vs. 3.14%), SCD outperforms VHY in total return, with a 199% lifetime return compared to VHY's 39%. The video also highlights how broad market index funds like IVV and VAS typically offer better total returns than dividend-specific ETFs. Ultimately, investors must weigh the trade-off between higher dividends and stronger capital growth when choosing between these investment options.

Takeaways

• 😀 **Dividend ETFs** can be compared across regions, but it's essential to understand the differences in underlying holdings, fees, and performance metrics.
• 😀 **VHY (Vanguard Australian High Yield ETF)** offers a higher dividend yield (5.5%) but has lower total returns (39% over 11 years) compared to the US-based SCD.
• 😀 **SCD (Schwab US Dividend Equity ETF)** delivers higher total returns (199% over 11 years), but its yield (3.14%) is lower than VHY's.
• 😀 The key difference between a **dividend** and a **distribution** is that dividends come from stocks, while distributions come from funds, though they are similar in practical terms.
• 😀 **Expense ratios**: SCD (0.06%) has a lower expense ratio than VHY (0.25%), which is notable when comparing the overall cost of investment.
• 😀 **VHY** tracks the **FTSE Australia High Dividend Yield Index**, while **SCD** tracks the **Dow Jones US Dividend 100 Index**, indicating a focus on different markets and sectors.
• 😀 Although **dividend-focused ETFs** tend to offer higher yields, this can sometimes be at the expense of long-term capital growth, as evidenced by the lower total return of VHY.
• 😀 When comparing long-term performance, **index funds like IVV (S&P 500 ETF)** tend to outperform dividend-specific funds, even though they offer lower yields.
• 😀 In terms of top holdings, the US-focused SCD holds companies like Verizon, Home Depot, and Coca-Cola, while VHY focuses on Australian companies like BHP, NAB, and Woodside Energy.
• 😀 For Australian investors, **VHY** offers better dividend yields (5.5%) compared to US-based dividend ETFs, but total return-wise, the US market (e.g., SCD) outperforms by a significant margin.
• 😀 Ultimately, choosing between **dividend ETFs** and **index funds** depends on whether you prioritize higher yield or stronger long-term capital growth.

Q & A

What is the main topic of the comparison between VHY and SCHD?

The main topic is comparing two high dividend-paying ETFs: VHY (Vanguard Australian High Yield ETF) and SCHD (Schwab U.S. Dividend Equity ETF), specifically looking at their dividend yields, total returns, and overall performance over different time periods.

What are the key differences between the two ETFs in terms of inception dates and expense ratios?

VHY was launched in May 2011, and SCHD was launched in October 2011. VHY has a higher expense ratio of 0.25%, while SCHD has a much lower expense ratio of 0.06%.

Which ETF has a higher dividend yield, and what is the yield percentage?

VHY offers a higher dividend yield at 5.5%, while SCHD has a lower yield of 3.14%.

How do VHY and SCHD compare in terms of total return over different time frames?

SCHD consistently outperforms VHY in total returns over all periods measured: 1 year (7.51% vs. 16.72%), 3 years (15.26% vs. 9.23%), 5 years (20.91% vs. 8.16%), and 10 years (14.2% vs. 8.97%). Over their lifetime, SCHD has a return of 199%, while VHY only returns 39%.

What is the significance of the term 'total return' in the context of this comparison?

'Total return' includes both the capital appreciation (increase in the value of the ETF’s shares) and the dividends (or distributions) paid by the ETF, providing a more complete measure of an investment's performance than dividends alone.

Why is the U.S. ETF, SCHD, able to achieve higher total returns than the Australian ETF, VHY?

SCHD outperforms in total return because U.S. stocks in SCHD are more diversified across various sectors, including technology and growth stocks, which tend to offer higher capital appreciation. In contrast, VHY is focused on high-yield stocks from industries like banks and mining, which provide steady dividends but less growth.

Does the higher dividend yield of VHY make up for its lower total return?

While VHY offers a higher dividend yield (5.5%), its total return is much lower than SCHD's, suggesting that higher yields may come at the cost of lower capital growth. Investors focusing on total return rather than just dividends may prefer SCHD.

How does the performance of an Australian index fund compare to the U.S. dividend-focused ETF?

In the comparison, the Australian index fund (ASX 300, VAS) outperforms the U.S. dividend-focused ETF (SCHD) in terms of dividend yield, returning 4.3% compared to 3.14%. However, the U.S. index fund (IVV, S&P 500) and U.S. specific dividend funds (like SCHD) tend to outperform Australian funds in total returns over longer time periods.

What are some potential drawbacks of focusing on dividend-specific ETFs like VHY or SCHD?

The main drawback is that while dividend-specific ETFs provide higher yields, they may not offer as much capital appreciation as broader market index funds. Additionally, focusing solely on dividends might result in investing in sectors with limited growth potential, like utilities or financials, which can limit overall returns.

What is the general conclusion about whether dividend-focused ETFs are better than general index funds?

The conclusion is that, based on the performance data, general index funds like the S&P 500 (IVV) tend to outperform dividend-specific ETFs like VHY and SCHD in terms of total returns over the long term. While dividend funds can be attractive for income-focused investors, total return investors may find better growth in broader index funds.