ASX investors who are used to owning exchange-traded funds (ETFs) that track Australian shares are probably used to receiving a hefty stream of dividend income as a byproduct.
Most ASX ETFs, including the popular market-wide index funds like the Vanguard Australian Shares Index ETF (ASX: VAS), routinely offer dividend yields between 3% and 5%. It's sometimes more, and occasionally less, depending on investing conditions. But long story short, Australian-focused ETFs are usually generous income investments.
It is a wildly different story when it comes to US-centred funds, though.
Just this morning, my Fool colleague Bronwyn covered the latest payout from the popular iShares S&P 500 ETF (ASX: IVV). It is estimated that owners of this ASX ETF, which covers the S&P 500 Index (SP: .INX) over in the 'States, will receive a quarterly dividend distribution of 17.35 cents per unit next month.
Together with July's payout of 23.3 cents, April's 13.95 cents, and January's 20.14 cents, IVV units are set to sport an annual dividend distribution total of 74.74 cents per unit.
That would give the iShares S&P 500 ETF a rough dividend distribution yield of about 1.02% at current pricing.
The BetaShares Nasdaq 100 ETF (ASX: NDQ) is slightly more impressive with a current trailing yield of 1.43%.
Image source: Getty Images
Why do ASX ETFs pay higher dividends?
Unless you are looking at a US-based ETF that specifically targets delivering high levels of dividend income, chances are you won't be able to secure an investment with a dividend yield above 2% in current circumstances. That contrasts notably with ASX ETFs.
But why? If the US houses many of the world's highest-calibre companies, which it arguably does, where is the dividend income?
Well, the answer is a complex one. In my view, it comes down to a mix of structural and taxational differences between the United States and Australia.
Let's go through them.
The US markets are structured in a very different manner from the ASX. Here in Australia, the top echelons of our market are dominated by banks and resources stocks. These companies tend to pay out a relatively high proportion of their earnings as dividends. As ASX index funds must hold more of these stocks than any other, they inherit this high-yield nature.
US funds, franking and returns
In contrast, the US markets are spearheaded by tech giants, companies like Apple, Alphabet, NVIDIA, and Microsoft. Whilst enormously profitable, these companies tend to retain most of their earnings for reinvestment, rather than passing them onto shareholders as dividends.
When it comes to tax, ASX companies are incentivised to pay out a dividend to shareholders thanks to our unique system of franking. Franking is intended to prevent double taxation of dividend cash, but is highly advantageous for investors. Particularly those on high incomes. As such, ASX companies tend to start paying their shareholders dividends as soon as they are able to do so. However, in the US, tax treatment of dividends is far less generous. As such, those companies have more of an incentive to retain their cash for reinvestment.
This combination is why US-based ETFs tend to provide less income than their ASX counterparts. Investors shouldn't mind, though. US-based index funds have delivered far better overall returns over the past decade or two than their ASX counterparts. Only time will tell if that paradigm holds up going forward. But sometimes, a higher dividend yield doesn't mean a better investment.
