Perhaps our tax system’s treatment of company taxes under the franking credit system. Or perhaps just the fact that most of the ASX 200’s largest companies, like the ASX banks and miners, have a history of prioritising shareholder income.
Either way, Aussie investors love their dividends, and our share market in many ways reflects this. The same can’t be said of other countries though, especially the United States.
US shares have never been known for their dividends. Several of the US’s largest companies, such as Alphabet Inc, Amazon.com Inc, Facebook Inc and (most famously) Warren Buffett’s Berkshire Hathaway Inc don’t (and never have) paid out dividends (with the exception of a one-off from Berkshire in 1967). An equivalent situation on the ASX would be almost unthinkable.
As a case in point, let’s take an index exchange-traded fund (ETF) covering the ASX shares – the Vanguard Australian Shares Index ETF (ASX: VAS). It currently offers a trailing dividend yield of 3.58% (plus franking) on current data. Meanwhile, an index ETF covering US shares, such as the iShares S&P 500 ETF (ASX: IVV) offers a trailing yield of just 1.64%.
So, are income investors who would like to add some US shares to a dividend portfolio fresh out of luck?
Not necessarily. There’s an ETF out there that deals with this very issue. It’s the BetaShares S&P 500 Yield Maximiser Fund (ASX: UMAX).
UMAX out your payouts
This fund isn’t you’re typical market-tracking index fund. It does follow the S&P 500 Index (INDEXSP: .INX) (tracking most of the largest 500 companies in the US). But it uses an options strategy to increase the income the fund generates. To illustrate, the fund currently offers a trailing yield of 7.2%. How does this work?
According to BetaShares, here’s how:
In addition to the share portfolio, the fund will also sell (or “write”) exchange-traded index call options on up to 100% of the fund’s exposure to the index. The call options will generally be written with terms of less than three months…
By writing index call options, the fund will receive option premiums which are expected to provide an additional source of income for the fund and a partial hedge against a decline in the value of the share portfolio. The fund’s strategy is expected to outperform a strategy of holding the share portfolio alone (i.e. without writing index call options), in falling, flat and gradually rising markets.
If you’re still confused by this strategy, here is some more information about how options work.
Is UMAX a buy for dividend income?
The BetaShares S&P 500 Yield Maximiser Fund is currently rated as a ‘buy’ for the Motley Fool’s Dividend Investor service, as well as our Everlasting Income service.
Our Fool analysts love the increased income prospects this fund offers, it’s quarterly distribution schedule, exposure to the US markets, and the international diversification it brings to the table.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Sebastian Bowen owns shares of Alphabet (A shares) and Facebook. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Berkshire Hathaway (B shares), and Facebook and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short December 2020 $210 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Berkshire Hathaway (B shares), and Facebook. 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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