ETFs (and other ASX-listed Products) that Pay Monthly Distributions

“If we have food and covering, with these we shall be content.” ~1 Timothy 6:8

Some time ago I wrote about the Betashares Australian Dividend Harvestor Fund (HVST), which as of now has a very high dividend yield (about 9%) and pays monthly distributions. Monthly distributions are very convenient if you are living off passive income because, for day-to-day expenses such as food, it is more convenient to receive your payment more frequently. Most ETFs pay distributions every quarter, which is quite a long time to wait.

That being said, quarterly or even yearly distributions may be convenient for spending on things you spend less frequently on e.g. a holiday. Suppose you had $100k invested returning 4% dividends. This is $4k per year but paid monthly this would be $333 per month, which means if you wanted to save up for a holiday you’d need to take that $333 per month and put it in a savings account and wait for it to accumulate to $4k before you take an annual holiday. However, if you put that $100k into an ETF that pays yearly distributions, then you’d get $4k once a year, and when you get your $4k, you can go ahead and book your flights and hotels online. The fact that the ETF pays yearly rather than monthly distributions acts to force you to save for those expenses that occur yearly (typically a holiday).

Therefore, I think it is useful to have a mixture of distribution payment frequencies to match what you spend your money on. However, when it comes to financial independence, you shouldn’t focus on holidays first. You should focus on the necessities, and even though I am an atheist, I like to quote 1 Timothy 6:8 in this instance: “If we have food and covering, with these we shall be content.” In many translations of the bible, it claims that you should be content with “food and raiment,” and the word “raiment” is often translated as referring to clothing, but really raiment refers to covering, i.e. not only clothing but also shelter i.e. four walls and a roof over your head. Why am I talking about food and coverings? Because generally food and rent consist of payments we make frequently. For most people, food spending consists of going to the local supermarket to buy e.g. bread. Rent or mortgage payments are usually monthly payments to the landlord or bank. As such, it is better to have monthly passive income if you’re living off passive income while covering the necessities of life.

In my greed to secure monthly passive income to cover the cost of necessities such as bread and almond milk, I invested a reasonable amount of money into HVST, which at the time was paying about 12% dividend yield. However, the problem with high yield funds is that they are high risk funds as well. In fact, most ASX-listed products that pay high monthly passive income perform quite badly in terms of capital preservation. This may be due to the rising interest rate environment. Many high-yield ETFs and LICs that have managed to achieve reasonable capital preservation have been those that pay quarterly distributions e.g. VHY, IHD, STW, and BKI. The reason I believe this is the case is that stocks provides higher yield than e.g. bonds, but there is greater risk in stocks. Unless we are talking about variable-rate bonds, most bonds are fixed-income products, e.g. a government bond pays you a fixed coupon amount. You can therefore rely on this coupon always being paid. There is little uncertainty. Dividends from stocks, however, may vary depending on market volatility and business activity. For example, recently BHP announced it was buying back shares and paying a special dividend thanks to the sale of a US shale asset to BP. If a fund manager holds BHP, it may receive a huge dividend one day and then the next month may receive little dividends. If economic conditions are challenging, dividends may be cut. As such, if a fund manager were relying on stock dividends to pay monthly distributions, there may be times when dividends are low, which means that in order to maintain the high monthly payout, the fund needs to eat into original capital.

When focusing on financial independence, it make sense to focus on the necessities first, i.e. food and raiment rather than holidays, and given that it is more helpful to have monthly passive income to fund these expenses, I believe it is necessary to look instead at medium-yield (not high-yield) exchange-traded products that pay monthly distributions. Assuming food costs $300 per month and rent costs $700 per month then this means you need $1000 per month for necessities, which means $12k per year. You only need $150k invested earning 8% to get this. This is the allure of high-yield funds. However, with high yield comes high risk, so a medium-yield fund may provide a good compromise.

Remembering that investing has a risk-return tradeoff, and remembering that food and raiment are necessities (you cannot live without food and covering), we should not rely on high-yield high-risk investment to fund necessities. We should at least rely on medium-yield medium-risk investments to fund necessities.

I make these comments because recently I have purchased Betashares’s hybrid ETF (HBRD), which pays about 4% monthly. I have found that HBRD pays very reliable income, almost the same every month whereas virtually all other investments pay variable passive income. Looking at the Bloomberg price chart of HBRD below, you can see that HBRD (in black) is somewhat correlated to the XJO (represented in orange by the STW ETF) but with a lower volatility (or lower beta). This makes sense because hybrids are lower risk than stocks but are riskier than bonds. (Hence they are hybrids as they have bond-like and stock-like characteristics.)

HBRD (in black) has lower volatility than XJO (in orange)
Source: Bloomberg

In fact, Betashares seems to have learned its lesson from HVST and have introduced a slew of other medium-risk ETFs (e.g. CRED and now BNDS) that pay monthly distirbutions to complement their existing inventory of low-risk income ETFs (e.g. AAA and QPON) and high-risk income ETFs (HVST, YMAX, EINC, and RINC).

Below is a table of ASX-listed products (mostly ETFs, LICs, and LITs) that pay monthly distributions. The products below are sorted by risk/yield. I have used my judgement to classify these are high, medium or low yield. Generally high-yield investments derive income from stocks and pay around 5% to 10% yield, medium-risk investments derive income from hybrids and corporate bonds and pay around 3% to 5% yield whereas low-risk investments derive income from cash deposits and government bonds and pay around 1% to 3% yield. Some of these products invest in highly risky areas e.g. QRI will invest in commercial real estate debt. Note that some of these investments have not been released yet and that this is a personal list that I keep that may not include all ASX-listed investments that pay monthly passive income. If I have missed any, please notify me in the comments section.

ASX TickerNameYield
HVSTBetaShares Australian Dividend Harvester FundHigh
PL8Plato Income Maximiser LimitedHigh
QRIQualitas Real Estate Income FundHigh
AODAurora Dividend Income Trust High
EIGAEinvest Income Generator Fund High
GCIGryphon Capital Income TrustHigh
MXTMCP Master Income TrustHigh
HBRDBetaShares Active Australian Hybrids FundMedium
CREDBetaShares Australian Investment Grade Corporate Bond ETFMedium
BNDSBetaShares Legg Mason Australian Bond Fund Medium
QPONBetaShares Australian Bank Senior Floating Rate Bond ETFLow
AAABetaShares Australian High Interest Cash ETFLow
MONYUBS IQ Cash ETFLow
BILLiShares Core Cash ETFLow

Disclosure: My investments include BHP, IHD, HVST, AOD, HBRD, and AAA.

6 thoughts on “ETFs (and other ASX-listed Products) that Pay Monthly Distributions”

  1. Calvin..I am early retired, live off dividends and agree that I like stocks that pay monthly or quarterly too. As I discussed previously on your forum I am a disgruntled ex owner of HVST. That stock is now around $14.50 after being around $22 when I bought in and will just head lower, I dont know how one can own it and be happy with the capital loss and the lack of clarity from Betashares, puts me off owning anything they put out. I wont ramble on any more about but its a disappointment for dividend investors IMO.
    Aurora(AOD) has a tempting yield but is another with a falling share price since 2015, also they have a fairly disturbing balance sheet as well as problems with providing information to the asx. I’d be real careful with AOD and hope you dont have too much invested with them as they are high risk IMO, might even been suspended from trading as I write this..not liquid enough either for me and I hope you can get out if you have to.

    I like about 5% return from my dividend stocks and if they come with franking thats a bonus…PL8 and MXT are ones thats I have monitored but I like a few runs on the board before I invest.
    REIT’s can be unsafe given interest rate moves affect them but they are a necessary evil for dividend hungry investors, they also pay quarterly in most cases and at different months to most other stocks so you can manipulate your portfolio to have dividends being paid every month of the year if you own a few. My rule is no more than 10% of your portfolio should be in real estate but with Bill Shorten planning on taking my franking credits I may have to adjust that up slightly.
    I also have a small holding in Latrobe Financial with their Mortgage account at 5.2%…pays monthly and has never lost a dollar over 60 odd years…impressive but like I said I dont get too greedy and keep it as a small holding…
    I do like the banks, AFI, ARG, AUI etc and while they do cross over a bit they do provide some safety and consistency in paying and I’m not a bank basher either…IMO they are cheap at the moment and pay great dividends…whats not to like and I dont buy the pessimism that share advisory services peddle in relation to the banks. Sure they wont have great growth for a couple of years but they will still pay great dividends IMO and your money is as safe as you can get on the ASX..
    Enjoy reading your articles and please keep posting, its very interesting to read how others pick stocks and setup to retire
    and live off dividends…

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    1. Thanks Mark. I do have AOD but not much. I agree with the issues you highlight with HVST and this has made me keen in researching investments and seeing track record. I admit I may have been somewhat careless in the past. Nevertheless, diversification across many different ETFs I think can’t go wrong and I have recently been reading Peter thornhill articles about LICs so might dip my toes into some later.

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  2. Would you consider buying a standard index fund (eg. Vanguard VAS that follows the ASX300) which has quarterly distributions, getting those distributions deposited automatically to a savings account, then have the savings account transfer a set amount to your transaction account each month? I had suggested this as a solution when a friend was asking about getting a consistent amount month-by-month. (Obviously, distributions may differ, so having a base level buffer in your savings account would help to maintain that consistent transfer amount).

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    1. Thanks for your comment michelle. No I haven’t considered this, and it is a good idea. The only downside is the extra administrative burden and setting the automatic transfer amount such that you don’t transfer more than you have and go into overdraft. This can be a good idea because typically ETFs that pay quarterly distributions tend to have higher long run yields.

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    1. Thanks for your comment easypeasyfire. I don’t know too much about LICs unfortunately. There would be other sites that explain them in detail. Based on what I have read, there doesn’t seem like there are any issues with LICs and I feel they can be used in addition to using ETFs.

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