There are a number of high-yield ASX stocks that offer investors excellent passive income. However, I don't think those businesses are negative-free.
Some businesses are known for offering a significant portion of their overall return as dividends. I'm thinking of names like Fortescue Ltd (ASX: FMG), Rio Tinto Ltd (ASX: RIO), BHP Group Ltd (ASX: BHP), ANZ Group Holdings Ltd (ASX: ANZ), Westpac Banking Corp (ASX: WBC), and Woodside Energy Group Ltd (ASX: WDS).
Dividend income is useful. It's a real return, and it can outclass the income offered from a bank savings account. Additionally, depending on the business, dividend payments can be less volatile than the share price.
However, there are also two significant negatives that I want to point out.
Higher taxes?
Some investors may be lucky enough that they are not being taxed on their income because they are in a zero tax bracket. High-yield ASX stocks can make sense in their hands.
However, most working Australians are probably paying some sort of tax.
If a full-time working Australian owns a high-yield stock, then a significant portion of their return is being lost to tax each year. Investors in the highest tax bracket may be losing close to half of their cash return to the ATO annually.
Capital growth isn't taxed until the gain has been crystallised following the sale of those shares (or another asset).
Reduced funding for growth
The cash that high-yield ASX stocks use to pay their dividends doesn't appear out of thin air.
It has been paid from the profits generated from the business.
The company has a choice about what to do with the cash. It can send most/all of that profit to shareholders' bank accounts. But if it does that, the business will have less money to invest in more inventory, open another store, conduct more research and development, or use it for another purpose to help future potential growth.
Warren Buffett's Berkshire Hathaway has famously decided against paying a dividend for decades so that it can reinvest in opportunities.
For Australian companies, paying a dividend makes some sense because it unlocks franking credits (which are generated when they pay corporate income tax). However, the higher the dividend payout ratio goes, the less earnings and capital growth I'd expect in the future.
There are a few high-yield ASX dividend shares I like, such as GQG Partners Inc (ASX: GQG) and APA Group (ASX: APA), but I'm focused on ASX shares with a medium level of dividends for my portfolio rather than high-yield ASX stocks.
