Low interest rates have intensified the search for higher income returns
Noted in a recent article, Australian households are now holding record amounts of cash.
Reserve Bank data shows the weighted average interest rate being paid on term deposit amounts up to $10,000 held in authorised deposit-taking institutions (ADI) such as banks and credit unions was just 2.85% per annum at the end of August.
As official interest rates fall, so do bank deposit rates. And this may tempt some investors to look at switching their cash into other types of investments.
For example, dividend payments from many companies listed on the Australian Securities Exchange (ASX) have been flowing through to share market investors over recent weeks. Many investors rely on company dividends as a core part of their income stream.
Which brings us to the topic of company dividend yields, which in some cases can appear to be very attractive.
Market Index data shows there were more than 100 companies on the ASX as at 23 October 2025 with trailing dividend yields of between 5% and 10%.
Dividend yields are calculated by dividing a company’s prevailing share price by its declared annual dividend payment per share. Keep in mind that dividend yields move constantly up and down during market trading, in tandem with company share prices.
More than a dozen ASX companies had trailing dividend yields above 10% last week, including one with a yield above 50% and another with a yield in the high 40% range.
Beware of quoted dividend yields
It’s often said in investing circles that if something sounds too good to be true, it usually is.
So, income investors seeking out companies purely on the basis of quoted dividend yields need to be extremely careful.
A high dividend yield is not necessarily an indicator that a company has any capacity to pay out a future dividend. In fact, the opposite may be the case: many companies with high trailing yields may need to reduce or even suspend dividend payments.
A high trailing yield may also be because of a sharp decline in the share price rather than because a company is able to pay out a strong, consistent dividend payment. If a company’s price falls significantly, a high yield may be a sign of underlying problems with the company.
The share price of the company with the highest trailing yield on the ASX has fallen by more than 50% over the last year. This has inflated the dividend yield figure you might see quoted by stock market websites and data providers.
Likewise, the share prices of the companies with the next highest yields have also fallen over the same period.
Dividend payments can change
One of the fundamental investment lessons for income-focused investors is that dividend payments are not locked in stone.
In the same way that dividend yields, especially during volatile trading conditions, can gyrate wildly from day to day, company dividend payments can be cut, increased, or stay the same.
Some companies may have optically high yields due to one-off special dividends. Others in financial trouble may maintain or even increase their dividend payments to attract investors, but this can be a sign that the company is struggling to generate sufficient cash flow.
The recently ended Australian company reporting season saw a number of companies trim their dividend payouts. Difficult operating conditions were largely to blame.
Certain sectors often have higher dividend yields, but these can be more vulnerable to economic downturns or regulatory changes.
Reducing dividend income risk
It’s always important to undertake thorough research on a company’s financial health, including its earnings, debt levels, and cash flow. That will be a good indicator of its capacity to pay out dividends.
Monitor the company’s performance and any changes in its dividend policy.
One way to reduce dividend income risk – the risk of being over-exposed to the payout policies of specific companies – is through diversification.
That can be achieved by having broader exposures to diversified income streams via a large pool of listed companies, such as though an exchange traded fund (ETF) and/or a managed fund covering the largest companies in a single market or across multiple markets.
Think of these funds as a form of fishing net that will catch the dividends of every company that falls into their investment focus, for example every company that’s contained within the S&P/ASX 300 Index.
The key advantage for investors is that irrespective of individual company dividend yields and payouts, a fund will aggregate all dividends and distribute them to investors.
While dividend flows may decline over them medium term, having exposure to many companies allows investors to access a broader portion of the total dividends spectrum.
Doing this also eliminates the need to focus on the dividends of individual companies and their dividend yields, which can be a dangerous trap for investors.
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Source: This article has been reprinted with the permission of Vanguard Investments Australia Ltd. Copyright Smart Investing
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