As most of us would be aware, some ASX shares have a reputation for paying out relatively large dividends. Our unique system of franking is partially responsible.
When a company can get a tax deduction from a dividend, it’s hard for it to deny this to its clamouring shareholders.
That’s why the vast majority of S&P/ASX 200 Index (ASX: XJO) shares start paying dividends as soon as they can, and by as much as they can. But this is a rather unusual paradigm when you zoom out and look that the rest of the world. Especially in the United States.
All ten of the ASX 200’s top ten companies pay a dividend. And yet only five of the largest ten companies in the US S&P 500 Index (SP: .INX) do the same.
Sure, Alphabet Inc(NASDAQ: GOOG)(NASDAQ: GOOGL), Facebook Inc(NASDAQ: FB), Berkshire Hathaway Inc(NYSE: BRK.A)(NYSE: BRK.B) and Amazon.com Inc(NASDAQ: AMZN) could pay a dividend if they wanted to. Each of these companies has tens of billions of dollars on their balance sheets. But they choose not to.
That’s why an exchange-traded fund (ETF) that covers this index, such as the iShares S&P 500 ETF(ASX: IVV), offers a pretty miserly trailing yield of 1.46% today.
Looking at this yield, it’s no wonder that many ASX dividend investors don’t bother with investing in US shares.
But it doesn’t have to be this way.
A juiced-up US dividend ETF
The BetaShares S&P 500 Yield Maximiser Fund(ASX: UMAX) is an ETF that aims to solve this problem. Yes, it invests in the same S&P 500 Index as IVV does. And yet it offers investors a trailing yield of 7.2% today. More than four times that of the iShares product.
How is that possible? Well, UMAX employs what’s known as an options strategy to squeeze a little more yield from the S&P 500 than a regular index-tracking ETF.
The fund writes call options on the S&P 500 that expire around three months from when written. According to BetaShares, these options are “expected to be approximately 2% to 5% above the then-current level of the index”.
If the index performs outside these expectations that the call options assume, the fund makes additional income, which it uses to juice up the dividend distributions it can pay.
Now if that’s all over your head, I wouldn’t blame you. It’s a bit of a neat trick the fund is attempting to pull off. But it does work to increase the income you can expect from a basket of US shares.
There’s no free lunch though
However, there’s no such thing as a free lunch. BetaShares states the following on this matter:
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 andgradually rising markets. However, the Fund’s strategy can be expected to underperform in a strongly rising market.
And the fund is being a little optimistic, even here. BetaShares’ own data shows that UMAX has returned an average of 7.28% per annum over the past five years. The pure S&P 500 Index has returned an average of 13.61% per annum over the same period.
So long story short, it seems investors are giving up a disproportionate level of capital growth for a smaller boost in income. UMAX also charges a management fee of 0.79% per annum, whereas IVV charges just 0.04%.
Still, if dividend income is a priority for you and your investing strategy, this ETF remains worthy of consideration. And it also offers the benefits of increasing the diversification of an ASX dividend portfolio by including US companies, some of which are the best in the world.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fools board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fools 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), Amazon, Berkshire Hathaway (B shares), and Facebook and recommends the following options: short January 2023 $200 puts on Berkshire Hathaway (B shares), short March 2021 $225 calls on Berkshire Hathaway (B shares), long January 2022 $1920 calls on Amazon, short January 2022 $1940 calls on Amazon, and long January 2023 $200 calls on Berkshire Hathaway (B shares). The Motley Fool Australia owns shares of and has recommended BetaShares S&P500 Yield Maximiser. The Motley Fool Australia has recommended Alphabet (A shares), Amazon, Berkshire Hathaway (B shares), Facebook, and iShares Trust – iShares Core S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.