Dividend vs Yield Investing Strategy

Dividend investing and yield investing are popular strategies on the Australian Securities Exchange (ASX), which is known for its high dividend-paying stocks, particularly in sectors like banking, mining, and consumer staples. While both strategies focus on generating income from stocks, they differ in their focus and approach. Let’s break down the two strategies and how they can be applied to ASX-listed stocks.

Dividend Investing Strategy on the ASX

Dividend investing focuses on buying stocks that consistently pay dividends. Investors who follow this strategy seek stable, reliable income from their investments, often prioritizing companies that have a strong history of regular dividend payments and the potential for dividend growth.

Key Characteristics:

Dividend Consistency: Investors look for companies that have a strong track record of paying dividends consistently over time. ASX companies like Commonwealth Bank (ASX: CBA), Wesfarmers (ASX: WES), and Telstra (ASX: TLS) are well-known for their regular dividend payouts.
Dividend Growth: Beyond consistency, dividend investors often seek companies with the potential to increase their dividends over time. Growth in dividends usually signals strong financial health and profitability.
Dividend Payout Ratio: This is the percentage of earnings a company pays out as dividends. A lower payout ratio suggests the company is retaining enough earnings for growth, while a higher payout ratio might indicate a commitment to distributing profits to shareholders.
Franking Credits: The ASX has a unique feature called franking credits, which makes dividend investing particularly attractive in Australia. Franked dividends allow investors to receive a tax credit for the corporate tax already paid by the company, reducing their overall tax burden.

5. Examples of Dividend Stocks on the ASX:

Commonwealth Bank of Australia (ASX: CBA): Known for its stable, high dividend payments. CBA’s dividends for the last 5 years have returned an average of 1.80% per year.
BHP Group (ASX: BHP): One of the world’s largest mining companies with strong dividend yields, especially when commodity prices are high. BHP’s dividends for the last 5 years has fluctuated return between 3.57% and 5.96% per year.
Westfarmers (ASX: WES): is a diversified business operating in supermarkets, department stores, home improvement and office supplies, resources, chemicals, energy & fertilisers, and industrials & safety products, after growth it has great yields.

Why Choose Dividend Investing:

Stability: Dividend stocks tend to be more stable, making this strategy appealing to conservative investors, retirees, or those seeking passive income.
Income Generation: Regular dividend payments provide a steady stream of income, which can be reinvested or used for living expenses.
Capital Growth: In addition to income, many dividend-paying companies also offer capital appreciation over the long term.
For an in-depth look into Dividend investing, check out Dividend Investment Guide

Yield Investing Strategy on the ASX

Yield investing places emphasis on the dividend yield, which is the annual dividend payment expressed as a percentage of the stock’s current price. Investors who focus on yield investing are primarily concerned with maximizing their income return from dividends relative to the price they pay for the stock.

Key Characteristics:

Dividend Yield: Yield investors prioritize stocks that offer high dividend yields, often above the market average. The formula for calculating dividend yield is:A higher yield means investors are getting more return in dividends relative to the stock’s price.
High-Yield Stocks: Yield investors often target companies offering high dividend yields. However, they must be cautious, as an unusually high yield could be a warning sign of financial distress or a potential dividend cut.
Risk Management: High dividend yields can be enticing, but yield investors must ensure the company’s dividends are sustainable. A high yield resulting from a sharply declining share price could indicate the company is struggling.
Franking Credits: Just like with dividend investing, franking credits enhance the after-tax income for yield investors, making high-yield stocks even more appealing.

Examples of High-Yield Stocks on the ASX:

Telstra (ASX: TLS): Known for its high dividend yield, it is particularly appealing to income-focused investors. TLS’ average dividend yield growth rate of around 4.64% per year.
National Australia Bank (ASX: NAB): A major player in the Australian banking sector, offering strong yields. NAB’s average dividend yield growth rate of around 2.71% per year.
Transurban Group (ASX: TCL): A leader in toll road operations, consistently providing a high yield due to its infrastructure business model. TCL’s average dividend yield growth rate of around 3.79% per year.

Why Choose Yield Investing:

Higher Income: Investors who prioritize current income may choose stocks with higher yields to maximize the cash flow from their investments.
Relative Value: High-yield stocks may offer better relative value compared to lower-yielding peers, especially in a low-interest-rate environment.
Inflation Hedge: High yields can help protect against inflation by providing income that may grow over time.

Which Strategy Is Best?

Dividend investing is ideal for those looking for long-term stability and growth in income, making it a good fit for retirees or conservative investors who want to rely on consistent income and avoid volatility.
Yield investing appeals to investors who want to maximize current income and are willing to take on more risk to achieve higher returns in the form of dividend payments. However, they must be diligent in assessing the sustainability of the high yields.

Dividend and Yield Tools

Dividend and yield traders often use a variety of tools and strategies to make informed investment decisions. Below are the key tools and methods they commonly employ:

Charting Software Tools
For technical analysis, check the video for our charting tools below:
- Bollinger Bands: Help identify volatility and overbought/oversold conditions.
- Moving Averages: Used to smooth out price data and identify trends.
- Relative Strength Index (RSI): Measures the speed and change of price movements.
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Fundamental Data
For fundamental data, check the video for our fundamental tools below:
- Company Financials: Traders use fundamental analysis to assess a company’s earnings, revenue, and growth potential, especially when trading stocks.
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Educational Resources

Educational materials to deepen understanding of position trading strategies and techniques like in the Trade for Good Learn section, click here.

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The Bottom Line

Both dividend and yield investing are viable strategies on the ASX, but they cater to different investor needs.
Dividend investors prioritize long-term income stability and dividend growth, while yield investors seek the highest possible returns from dividends relative to the stock price. The unique Australian franking credit system also enhances the attractiveness of both strategies, offering tax advantages that make dividends and yields even more appealing in the ASX market.