2020 has been an especially tough year for ASX dividend income investors. The conventional dividend wisdom of the ASX that has lasted decades has seen its end in 2020. The ASX banks being the kings of the ASX fully franked dividend? No longer. Buying Sydney Airport Holdings Pty Ltd (ASX: SYD) or Transurban Group (ASX: TCL) for ‘safe’ cash flow? Not anymore.
The earnings reporting season we’ve just gone through was a bit like a game of cat and mouse when it comes to dividends. Some companies cut theirs, others kept them steady and some even increased them. But for a dividend investor with what used to be considered a diversified income portfolio, I’m sure it was an anxious wait. Surely there’s a better way of receiving dividend income that sticking with a bunch of companies you hope will be able to continue to give out cash flow each year. That’s a recipe for a very anxious earnings season in FY2021.
Luckily, I think there’s another way to deal with the dearth of dividends that 2020 has brought. And it’s using exchange-traded funds (ETFs).
How does a dividend ETF work?
Like all ETFs, a dividend-focused ETF will hold a basket of ASX shares within the single fund. However, unlike a pure index fund like the Vanguard Australian Shares Index (ASX: VAS), a dividend-focused ETF will only hold companies that fit its income criteria. That usually starts with the presence of the dividend itself and might include other factors, such as franking credits offered or how sustainable the dividend is.
That’s all well and good, but why is this an especially piquant idea for 2020?
Well, an ETF can adjust its underlying holdings every quarter without you as the owner required to exert any time and effort.
Backtrack a couple of years and both of these funds probably would have had the big four ASX banks as their top holdings. But seeing as bank dividends have more or less dried up in 2020, you’ll instead find the likes of BHP Group Ltd (ASX: BHP) and Wesfarmers Ltd (ASX: WES) dominating VHY and Woolworths Group Ltd (ASX: WOW) and Macquarie Group Ltd (ASX: MQG) at the top of IHDs holdings.
If these companies (hypothetically) happen to tell investors they won’t be paying a dividend in FY21, you’ll probably find companies like Telstra Corporation Ltd (ASX: TLS) and Rio Tinto Limited (ASX: RIO) taking their place before too long. And again, without you as the beneficial owner having to expend time or labour.
As such, I think all ASX dividend income-focused investors should at least consider adding an income fund like VHY or IHD to their portfolios in 2020. There are so many variables impacting the level of dividends coming out of the ASX this year, and it’s impossible (in my view) to completely map out a comprehensive income strategy as a result, at least for this year. I think including a dividend ETF can help manage this dilemma.
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Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited and Vanguard Australian Shares High Yield Etf. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited and Telstra Limited. The Motley Fool Australia owns shares of Transurban Group, Wesfarmers Limited, and Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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