Vanguard Australian Shares High Yield ETF (ASX: VHY) is an exchange-traded fund (ETF) that is known for paying a higher dividend yield for investors. But is it a buy for passive income?
The aim of this ETF is to provide low-cost exposure to ASX shares that have a higher forecast of dividends relative to other ASX shares.
Diversification is kept in mind, with the allocation of the portfolio to any one industry to 40% of the total ETF and 10% in any one company. Australian real estate investment trusts (REITs) are excluded from the index.
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How big is the dividend yield?
Vanguard tries to make it easier for investors to see how much passive dividend income might come from the ETF in the next 12 months.
The ETF provider's March 2023 fund characteristics metrics suggest that the forecast dividend yield for Vanguard Australian Shares High Yield ETF is 5.5% or 7.5% when grossed up to include the franking credits.
Those projections are reportedly sourced by Vanguard from FactSet. An ETF simply passes through the dividend income it receives from the underlying companies, so that's why it needs to know what the dividend forecasts are for those businesses.
Which ASX shares does it own?
At the end of March 2023, it owned a total of 72 positions.
The biggest 10 holdings made up more than 60% of the Vanguard Australian Shares High Yield ETF portfolio. So let's look at those names:
BHP Group Ltd (ASX: BHP) – 10.7% of the portfolio
Commonwealth Bank of Australia (ASX: CBA) – 8.9%
National Australia Bank Ltd (ASX: NAB) – 6.7%
Woodside Energy Group Ltd (ASX: WDS) – 6.4%
Westpac Banking Corp (ASX: WBC) – 5.8%
Wesfarmers Ltd (ASX: WES) – 5.8%
ANZ Group Holdings Ltd (ASX: ANZ) – 5.3%
Telstra Group Ltd (ASX: TLS) – 5%
Macquarie Group Ltd (ASX: MQG) – 4.7%
Rio Tinto Ltd (ASX: RIO) – 4.5%
So, a lot of the ETF's dividend income is going to come from those names I've just mentioned.
Is the Vanguard Australian Shares High Yield ETF a buy for passive income?
Clearly, the ETF is designed to capture a lot of dividends, and it has been effective at doing that because of the nature of the businesses involved.
Vanguard's performance table says that in the five years and ten years to March 2023, it paid an average distribution return of around 6%, excluding the franking credits.
So, if investors are only focused on the income, then it does what it says on the tin.
However, I think that it's worth pointing out that over the five years to March 2023, the Vanguard Australian Shares High Yield ETF only produced capital growth of an average of 3.4%. In the prior ten years, it made an average return per annum of 1.1%.
I don't think there's as much compound growth potential with many of these large businesses that are paying large dividends. So, if I were focused on total returns, I'd rather focus on an ASX dividend share that can deliver more growth. I like to target businesses where I think they can deliver good total returns, including useful dividends, such as Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and Brickworks Limited (ASX: BKW).
