Is it better to invest in ETF’s or LIC’s for dividends?

Hey Chantal, good question.

This one is a little complex to explain, but essentially ETFs and LICs are just the structure of the actual investment. With an LIC, income is received from the underlying shares and then the board of the LIC decide how and what to pay out in terms of dividends. With ETFs, because you own a small slice of a bunch of shares you basically automatically receive the small slice of the dividends paid on those shares.

With both, the dividends and tax effectiveness of them depend on the investments the ETF or LIC is investing in.

Hope it helps.

Ben

Hi Chantal. Well, depending on which funds you choose, both can pay dividends. So it depends on what you had in mind. Do you mean a stable income stream? Or do you mean the highest yield right now? Both are different.

In general, LICs have a greater ability to pay a smoother income stream, given they operate as a ‘company’ and are able to decide their own level of dividends to pay out based on their profit, whereas ETFs are forced to pay out all income and have no control over their payouts. In Australia, you’ll find that there are some old LICs which have produced similar dividends from year to year (historical, so not guaranteed going forward). Some LICs that have been around for decades include AFI, ARG, AUI and there others (just examples not recommendations).

If your goal was to target a high yield, but don’t care about the stability of that income, then there are a handful of ETFs which have are managed with that specific goal. A simple google search of ‘high yield ETFs’ and you’ll find a few options.

To be clear, both approaches (and both vehicles) have their pros and cons, but I hope this helps begin to answer your question :)