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Is an ASX ETF a good source of passive income?
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Tristan Harrison is one of the longest-serving writers at The Motley Fool Australia. Tristan has been contributing ASX news and stock analysis articles since 2016. His aim is to help Australians learn about great ASX shares, with a focus on ASX dividend shares and undervalued ASX growth shares. He holds an advanced diploma from the Association of Accounting Technicians and is enrolled in the Chartered Institute Management Accountant (CIMA) qualification program.
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The Vanguard Australian Shares Index ETF (ASX: VAS) is the largest ASX exchange-traded fund (ETF) and it also pays out significant dividend passive income to investors each year. How much income? I'm going to look at that in this article.
For readers who don't know what this ASX ETF does, it invests in a basket of 300 of the biggest ASX shares. Officially, it tracks the S&P/ASX 300 Index (ASX: XKO). It also gives us good diversification with just a single investment.
How are the distributions decided?
If a company makes a profit, then the board of directors can decide to pay a dividend to shareholders.
An ETF simply passes through the dividends and distributions it receives from its invested shares and sends those to investors. Some ASX ETFs pay a distribution every quarter, some pay every six months and some pay once a year.
The VAS ETF pays a distribution every quarter, creating regular cash flow for investors.
How much does Vanguard Australian Shares Index ETF (VAS) pay in dividends?
The ASX ETF is significantly invested in ASX blue chips that pay large dividend yields, such as BHP Group Ltd (ASX: BHP), National Australia Bank Ltd (ASX: NAB), ANZ Group Holdings Ltd (ASX: ANZ), Westpac Banking Corp (ASX: WBC), Fortescue Ltd (ASX: FMG), Telstra Group Ltd (ASX: TLS) and so on.
Due to this portfolio being weighted to plenty of stocks with a high dividend yield, the VAS ETF also has a good dividend yield.
According to Vanguard, the VAS ETF had a dividend yield of 3.8% as of 31 December 2023. Remember, this yield doesn't include the bonus of franking credits.
There are some lower-yielding names in the portfolio like CSL Ltd (ASX: CSL) which bring down the yield, but these sorts of stocks are the ones that can provide stronger capital growth.
Is it a strong ETF for passive income?
It certainly seems so, it has a stronger yield than globally-focused ASX ETFs such as iShares S&P 500 ETF (ASX: IVV) and Vanguard MSCI Index International Shares ETF (ASX: VGS).
However, Vanguard Australian Shares High Yield ETF (ASX: VHY) could be an even stronger option for income-focused investors because it only invests in sizeable ASX shares that have a high dividend yield. The VHY ETF had a dividend yield of 4.9% at December 2023, excluding franking credits.
