Is a dividend ETF really better than an ASX index fund for income?

How do dividend ETFs measure up against index funds?

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Key points
  • Index funds are the most popular ETFs on the ASX
  • But the ASX also hosts dividend-focused ETFs
  • So are these income ETFs a better choice than an index fund?

ASX index funds are without question the most popular exchange-traded funds (ETFs) on the ASX. As it currently stands, the Vanguard Australian Shares Index ETF (ASX: VAS) is Australian investors' first choice when it comes to ETFs. And by a country mile too.

There's a lot to like about ASX index funds like Vanguard's. Investors get broad diversification, and exposure to some of the country's best companies, and ASX index ETFs tend to be generous when it comes to dividend distributions too.

But speaking of dividends, the ASX is also home to several ETFs that purely focus on maximising dividend income for their investors.

These ETFs might not be as popular as index funds like the Vanguard Australian Shares ETF. But they still command a significant chunk of the market.

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The ASX's dividend ETFs in focus

For example, the Vanguard Australian Shares High Yield ETF (ASX: VHY) has more than $4 billion in assets under management. Rather than investing in 200 or 300 shares like an index fund would, this ETF holds a far more concentrated portfolio of 73 shares (at its latest count).

It does this to focus on investing only in shares that pay out higher and more sustainable dividends compared to the broader market.

It's not the only ASX ETF that is built this way either. The ASX also houses the iShares S&P/ASX Dividend Opportunities ETF (ASX: IHD) and the SPDR MSCI Australia Select High Dividend Yield Fund (ASX: SYI), among a few others.

But are these ETFs really a better deal for those investors seeking dividend income? Well, that's what we'll be looking at today.

Well, let's start with the basics. So as of 28 February, the Vanguard Australian Shares ETF has returned 6.47% over the past 12 months, and an average of 8% per annum over the past three years. Over the past five, it has averaged 7.86% per annum.

This ETF has paid out four dividend distributions over the past 12 months, which come to an annual total of $6.36 per unit. That gives the Vanguard Australian Shares ETF a trailing yield of 7.25% on current pricing. This fund charges a management fee of 0.1% per annum.

Let's compare that to Vanguard's dividend-focused ETF.

Income or returns?

So Vanguard's High Yield ETF has returned 11.11% over the 12 months to 28 February. Over the past three years, it has averaged 11.53% per annum, and 8.55% per annum over the past five. This ETF pays out quarterly dividend distributions too.

On current prices, the past 12 months' total of $4.15 in distributions per unit gives this ETF a trailing yield of 6.26%. This fund charges a management fee of 0.25% per annum.

So, somewhat ironically, we can conclude that the Vanguard Australian Shares ETF offers a higher trailing yield right now than the Vanguard High Yield ETF. However, the High Yield ETF's overall performance (which assumes reinvested dividends) over one, three, and five years has been superior.

This doesn't carry over to some of the other dividend-focused ETFs on the ASX though. For example, the iShares Dividend Opportunities ETF has averaged 6.15% per annum over the past three years, and 4.6% per annum over the past five. It charges 0.23% per annum.

In the SPDR High Dividend Yield Fund's case, the story is different again. This ETF has given its investors a return of 8.08% over the 12 months to 28 February. Over three years, it has averaged 8.7% per annum, and 7.65% over five.

So when it comes to overall performance, Vanguard's High Yield ETF seems to take the crown over most other ASX income-focused ETFs. That includes Vanguard's own ASX 300 index fund.

Thus, we can conclude that investors would have been better off investing in this High Yield ETF over any period in recent history. But when it comes to raw dividend payments, Vanguard's Australian Shares ETF comes out on top. Go figure.

Motley Fool contributor Sebastian Bowen has positions in the Vanguard Australian Shares Index ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Vanguard Australian Shares High Yield ETF. 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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