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Is the Vanguard Property ETF a good long-term investment?

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Should investors looking for ASX dividend income consider Vanguard Australian Property Securities Index ETF (ASX: VAP) in 2020?

This exchange-traded fund (ETF) from the reputable Vanguard Group invests in ASX-listed real estate investment trusts (REITs), using the S&P/ASX 300 A-REIT index as a benchmark.

REITs are companies that have the majority of their assets invested in land, property, and housing assets, of which they receive a rental income. For a REIT, 90% or more of this rental income is usually required to be distributed every year to their investors, without tax paid at the corporate level. This unique system translates into a good chance that a top-quality REIT will offer a generous trailing distribution yield — albeit without the benefits of franking credits (as no company tax has been paid). This inherently makes REITs a popular choice for income investors.

Which ASX REITs does VAP hold?

At the time of writing, this Vanguard ETF holds 30 ASX REITs. The 5 largest holdings are as follows:

  1. Goodman Group (ASX: GMG) with a 23.55% weighting
  2. Scentre Group (ASX: SCG) with an 11.34% weighting
  3. Dexus Property Group (ASX: DXS) with a 9.32% weighting
  4. Mirvac Group (ASX: MGR) with an 8.89% weighting
  5. Stockland Corporation Ltd (ASX: SGP) with an 8.31% weighting

Some more prominent holdings you might have come across include National Storage REIT (ASX: NSR), BWP Trust (ASX: BWP), Rural Funds Group (ASX: RFF) and Unibail-Rodamco-Westfield (ASX: URW).

As a whole, the ETF’s median market capitalisation is $9.24 billion. Its average price-to-earnings (P/E) ratio comes in at 11.09 and the trailing dividend yield at 5.86%.

Is VAP a good investment for income?

With a trailing dividend/distribution yield of 5.86%, on the surface, VAP looks to be a top ASX share to own for dividend income. With interest rates at record lows, achieving a near-6% yield on investment sounds like a pretty good deal. However, this trailing yield may not be reflecting the current commercial environment for the REIT sector. Many of VAP’s holdings operate in the retail sector. Scentre Group, as an example, owns the Westfield-branded chain of shopping centres in Australia and New Zealand. Retail shops are still emerging from one of the most disruptive and damaging times in the history of Aussie retail. Many shopping centres would have been almost completely closed over the March and April months. This would have led to foregone rental payments to landlords like Scentre. In turn, this places enormous pressure on the REITs’ abilities to pay dividends at all.

Most ASX REITs haven’t yet told the market what their intentions regarding dividend payments are for the rest of 2020. But I’m expecting, at the very least, a significant dip for investors.

Going beyond 2020, I would expect things to get somewhat rosier. But we have to consider that the retailing landscape may have changed forever as a result of the coronavirus pandemic. As such, I think a better strategy is to find your favourite REITs within this ETF and invest in those separately, rather than buying this comprehensive index fund.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED. The Motley Fool Australia has recommended Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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