A Hefty Dividend Boosts Australia ETF

The reason dividend payouts are so high is that back in the 1980s, the Australian government eliminated the tax on dividends (ending what was effectively a double tax on corporate profits, since companies are taxed on the money they earn). As a result, Australian investors began to demand more dividends -- funny how that works.

Unfortunately, foreign investors, including iShares MSCI Australia shareholders, still get taxed in their home country. Also remember that dividend income received by the fund first goes to pay fund expenses; in the case of iShares MSCI Australia that amounts to 59 basis points.

Kangaroo Jump in iShares MSCI Australia The Australia-centered ETF rises up from Down Under

Source: TheStreet.com Ratings

As a result, the after-fee, after-tax yield that foreign investors can expect to receive is substantially diminished, although the fund still produces a higher yield than either the S&P 500 SPDR or iShares Dow Jones Select Dividend.

The table below shows the net effective yields for the three funds using a hypothetical 15% tax rate.

But high dividends mean slow earnings growth, right? Not necessarily. Between 2001and 2006 (based on earnings estimates for full-year 2006 results), firms in iShares MSCI Australia collectively grew earnings at a compound annual rate of 19.1%, compared with 14.2% for firms in the S&P 500 and 5.5% for firms in the DJ Select Dividend index.