Aussie dividends ETF catches eye of international investors

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Russell urges investors to consider cash alternatives with new ETF


Global investment services firm Russell Investments is encouraging investors to think outside term deposits and cash and look for income alternatives such as high dividend paying shares which can boost returns, provide capital growth and be more tax effective.

Russell’s High Dividend Australian Shares ETF (RDV), launched in May 2010, has just completed its first financial year. Despite a difficult market environment, RDV was able to deliver on its goal of earning a higher dividend yield than the broad market, while still maintaining an element of capital growth. It returned 6.2%, with a 5.4% dividend yield, or 6.6% yield once grossed up for franking credits. The yield for the broad market over the same period was 4.3% – over 100 basis points below RDV.

“RDV’s performance shows investors don’t have to sacrifice their capital growth to get a good income return and this should be a reason to diversify out of term deposits or cash,” said Scott Bennett, portfolio manager at Russell Investments. “RDV provides an income return and selects stocks which offer other desirable qualities such as capital growth, so investors can have their cake and eat it too,” said Mr Bennett.

The ETF is based on a specially constructed index, the Russell Australia High Dividend Index, which comprises Australian blue-chip companies with a bias towards those that have a high expected dividend yield but also meet other characteristics including: a history of paying dividends; dividend growth and consistent earnings.

Diversification and tax considerations key

Russell says investors should not only diversify out of cash but also make sure their equity holdings are diversified to reduce stock specific risk.
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“Investors are increasingly using ETFs as an anchor to a direct equity portfolio as it helps them diversify across stocks, sectors and industries. They then complement this with their own favourite stock picks or managed funds,” said Mr Bennett.
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Investors should also consider how they can take advantage of tax benefits such as franking credits as part of their investment strategy. For example, in the case of ETFs like RDV, franking credits are passed onto the investor. Equity ETFs, like RDV, have naturally lower turnover and can qualify for tax breaks under the CGT discount rules, meaning any realised gains made after a year may be one-third or one-half tax-free to investors. This is further enhanced by the fact the money investors would have used to pay tax each year may stay invested, adding to the growth potential of the investment.

Australian dividends catch eye of overseas investors

High dividend paying Australian equities are becoming popular with international investors who are relying on dividends to fund their income needs as yields from cash instruments in other developed economies remain low.
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“The fact international investors are scouring the Australian market for dividends shows how competitive the yields are in our market,” said Mr Bennett.
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“As we head into the new financial year we want investors to be aware of alternatives to cash investments which provide solid income but don’t require you to forgo other benefits such as capital growth,” Mr Bennett concluded.

The Russell High Dividend Australian Shares ETF tracks an index that is weighted towards companies that are expected to deliver dividends higher than the market average, however high dividends cannot be guaranteed. Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS License 247185 (RIM). This communication provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. Any potential investor should consider the latest Product Disclosure Statement (PDS) for the Russell High Dividend Australian Shares ETF (RDV) in deciding whether to acquire, or to continue to hold, units in RDV. Only persons who have been authorised as trading participants under the Australian Securities Exchange (ASX) Market Rules can apply for units in RDV through the latest PDS. Investors who are not Authorised Participants looking to acquire units in RDV cannot invest through the PDS but may purchase units on the ASX. Please consult your stockbroker or financial adviser. Past performance is not an indicator of future performance. The Russell Indexes are trademarks of Frank Russell Company (FRC) and have been licensed for use by RIM. RDV is not sponsored, issued, sold or promoted by FRC and FRC makes no representation or warranty regarding the advisability of investing in RDV or in any of the securities upon which the Russell Index is based. FRC has no obligation or liability in connection with the administration, marketing or trading of RDV. FRC is not responsible for and has not reviewed RDV nor any associated literature or publications and makes no representation or warranty express or implied as to their accuracy or completeness. FRC does not guarantee the accuracy and/or the completeness of the Russell Indexes or any data included therein and FRC shall have no liability for any errors, omissions or interruptions therein. Copyright 2011 Russell Investments. All rights reserved.

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