Best Dividend ETFs for 2026: VHY, HYLD & beyond
Is Vanguard VHY or Betashares HYLD a better buy for dividend ETF investing? Our full ASX dividend ETF review.
Every investor loves the idea of getting paid to hold an investment. Dividend ETFs make this possible by bundling dividend-paying companies into one simple, diversified investment.
In this guide, we'll explain how dividend ETFs work, how they generate income, how they're taxed in Australia, and what to look for when choosing the best dividend ETFs. We'll also show how to build a diversified income portfolio using ETFs like VHY, SYI, DVDY, MQYM and HYLD — and why experienced investors rarely rely on just one ETF or one market.
How Dividend ETFs Generate Income (Dividends vs Distributions)
When you own an individual share (like Commonwealth Bank or Wesfarmers), the cash you receive is called a dividend. When you own an ETF, the income you receive is called a distribution.
The difference exists because ETFs are structured as trusts, not companies.
Dividend ETFs hold portfolios of shares that pay dividends. The ETF collects all of those dividends (along with any other income, such as interest or realised capital gains), pools them together, and then distributes the income to investors.
If you own 1% of an ETF, you receive 1% of the income generated by the underlying portfolio.
Most Australian dividend ETFs pay distributions quarterly, although some newer funds aim to pay monthly.
Cum-distribution and ex-distribution explained
Dividend ETFs trade cum-distribution before the distribution is paid and ex-distribution after it.
When an ETF goes ex-distribution, its unit price typically falls by roughly the value of the distribution. This is normal. The value hasn't disappeared — it's simply been paid out to investors.
This is particularly noticeable around late June or early July, when many ETFs pay large end-of-financial-year distributions that may include capital gains.
Dividends vs Distributions: Why It Matters
Dividends are paid by companies from after-tax profits.
Distributions are paid by trusts and can include multiple income components, such as:
- Australian dividends
- Franking credits
- Capital gains
- Interest income
- Foreign income (for globally invested ETFs)
This distinction matters for tax reporting, which is different for ETFs than for individual shares.
How Dividend ETFs Are Taxed in Australia
Dividend ETFs are tax-transparent.
The ETF itself does not pay tax. Instead, all income earned by the ETF is attributed to investors, who then pay tax at their own marginal rate.
Each year, you receive a detailed annual tax statement from the ETF provider. This statement breaks down your distribution into the correct Australian Tax Office categories, including:
- Franked and unfranked dividends
- Franking credits
- Capital gains (discounted and non-discounted)
- Any foreign income
- Cost base adjustments
You use this statement to complete your tax return.
Franking credits still apply
If a dividend ETF receives franked dividends from Australian companies, those franking credits are passed through to investors.
This means dividend ETFs can be particularly tax-effective for Australian investors, especially retirees or those on lower marginal tax rates.
Capital gains distributions
If an ETF sells assets during the year (for example, due to index rebalancing), it may distribute capital gains to investors.
Low-turnover ETFs tend to be more tax-efficient, as they realise fewer gains over time.
DRPs and tax
Even if you reinvest your distributions using a Dividend Reinvestment Plan (DRP), the income is still taxable. Reinvesting does not defer tax — it simply converts cash income into more ETF units.
Dividend Reinvestment Plans (DRPs)
Most dividend ETFs allow investors to activate a DRP.
Instead of receiving cash, your distributions automatically buy additional ETF units. This allows income to compound over time, increasing future distributions without requiring additional capital.
DRPs are popular with long-term investors who don't need immediate income.
Why ETF Prices Often Drop Around 1 July
Many ETFs pay large distributions at the end of the financial year.
These payments often include accumulated income and realised capital gains. When the ETF goes ex-distribution, its price falls accordingly.
This is normal behaviour and should not be mistaken for poor performance.
What to Look for in a Dividend ETF
Not all dividend ETFs are created equal. Before choosing one, consider the following:
1. Income versus total return
Australian shares have historically delivered long-term returns in the range of 8–12% per year. Dividend ETFs aim to shift that return mix toward income rather than growth.
High yield alone does not guarantee better outcomes. Total return — income plus capital growth — matters.
2. Sustainability of dividends
Extremely high yields can indicate yield traps, where dividends are at risk of being cut. Some ETFs include quality or sustainability screens to reduce this risk.
3. Diversification
Many Australian dividend ETFs are heavily weighted toward banks and miners. Diversification across sectors and companies helps manage risk.
4. Fees
Management fees directly reduce income. Dividend ETFs typically charge between 0.20% and 0.35% per year.
5. Turnover and tax efficiency
Lower turnover generally means fewer capital gains distributions and better tax outcomes.
6. Provider quality and track record
Larger, established ETFs tend to offer better liquidity, tighter spreads, and more predictable behaviour through market cycles.
Examples of Australian Dividend ETFs
Vanguard Australian Shares High Yield ETF (VHY)
VHY is one of the most widely used dividend ETFs in Australia. It holds around 60–70 high-yield Australian companies, including banks, miners, and large industrials such as CBA and WES.
It pays quarterly distributions and is often used as a core income holding.
SPDR MSCI Australia Select High Dividend Yield ETF (SYI)
SYI uses a different index methodology and incorporates quality considerations. It offers similar income characteristics with a low management fee.
VanEck Morningstar Australian Moat Income ETF (DVDY)
DVDY focuses on companies with competitive advantages and dividend income. It is more concentrated than traditional dividend ETFs and suits investors seeking a quality tilt.
BetaShares S&P/ASX 200 High Yield ETF (HYLD)
HYLD is a newer ETF offering monthly distributions, which may appeal to investors seeking regular cash flow.
Each ETF has different construction rules, sector exposures, and risk profiles. Understanding the methodology is more important than chasing yield.
Building a Proper Dividend Portfolio
While a single dividend ETF can work, experienced investors rarely rely on just one income source.
Dividend ETFs are often complemented with:
- Cash and money market ETFs like AAA and MMKT
- Fixed income ETFs such as EARN or USHY
- Active income strategies like CIIH, IIGF or DIVI
- Individual shares and REITs such as SOL, CLW or CBA
Combining multiple income sources can smooth cash flow and reduce reliance on any single asset class or market.
Estimating Your Dividend Income
If you want to estimate how much income a portfolio could generate, you can use the Passive Income Calculator on Best ETFs.
The tool allows investors to model income using published ASX distribution data and compare different portfolio combinations.
So What Now? How to Invest
If you're ready to put this knowledge into action:
- Learn the fundamentals with Rask's free ETF investing course
- Build professional, diversified portfolios yourself using Rask Core
- Or let our team invest on your behalf with Rask Invest, where passive income portfolios are managed and automated for you
Dividend ETFs like VHY can be an excellent core holding, but professional investors understand that income investing works best when portfolios are diversified across ETFs, asset classes, and strategies.
Income investing is most effective when it's deliberate, diversified, and long-term — not driven by yield alone.
If you get that right, your portfolio doesn't just grow.
It pays you along the way.