Exchange-traded funds (ETFs) don't typically offer a combination of good dividends and solid capital growth. But the VanEck Morningstar Australian Moat Income ETF (ASX: DVDY) could provide a perfect mix, with a clear focus on passive income.
I believe there are plenty of ASX ETFs based on international shares that have the potential to provide good capital growth. But Australian companies have the added benefit of paying franking credits to investors, which can boost the after-tax dividend yield for Australian tax residents.
I love individual ASX dividend shares, but I also think there's space in the portfolio for an ASX ETF that owns a group of appealing dividend-paying businesses.
What it does
Provided by VanEck, it has a diversified portfolio of ASX-listed companies selected by Morningstar to provide access to the 25 highest dividend-paying ASX-listed securities [excluding Australian real estate investment trusts (REITs)] that "meet Morningstar's required criteria which combines its 'economic moat' and 'distance to default' measures".
VanEck describes an economic moat as a company's ability to maintain its competitive advantages and defend its long-term profitability. For Morningstar, there are five sources of competitive advantage – switching costs for customers, intangible assets (such as brand power and patents), network effects, cost advantages, and efficient scale.
With the distance to default measure, it's a prediction about how likely a bankruptcy is, which has also been an effective predictor of dividend cuts. It looks at the balance sheet and share price volatility.
This ETF comes with an annual management cost of 0.35%, which is fairly cheap for the amount of analysis work done to create this portfolio.
What is the VanEck Morningstar Australian Moat Income ETF dividend yield?
An ASX ETF essentially just passes on the dividends it receives from its investments to the owners of the ETF units.
So, an ETF's yield isn't necessarily going to be the same over the next 12 months as the last 12 months, even if it owns the exact same businesses because those payments can change.
Since the ETF's inception on 7 September 2020, its passive income return has been an average yield of around 5%. Franking credits are a bonus.
According to VanEck, the 12-month distribution yield as at 31 March 2023 was 6.1%.
What ASX shares does it own?
As mentioned, this ASX ETF owns 25 holdings.
Investors may have heard of some of the largest positions in the portfolio.
On 6 April 2023, these were some of the biggest holdings: Sonic Healthcare Ltd (ASX: SHL), AUB Group Ltd (ASX: AUB), Orora Ltd (ASX: ORA), Steadfast Group Ltd (ASX: SDF), Lovisa Holdings Ltd (ASX: LOV), McMillan Shakespeare Ltd (ASX: MMS), Telstra Group Ltd (ASX: TLS), and Wesfarmers Ltd (ASX: WES).
Each of those positions have a weighting of at least 4.2%.
Foolish takeaway
I think this ETF can enable investors to buy a group of quality of ASX dividend shares for income and, hopefully, capital growth. But, I think there are certain ASX dividend shares worth a spot in a portfolio that doesn't already include them in its holdings.
