The iShares S&P 500 ETF (ASX: IVV) is one of the largest exchange-traded funds (ETF) on the ASX and offers plenty of the things that investors might look for. But, is this a good option for dividend passive income?
For readers that don't know what the ETF does, it provides investors exposure to the US share market. It is invested in 500 of the largest and most profitable businesses in the US.
The provider of the ETF, Blackrock, charges a management fee of just 0.04%. That enables investors to receive almost all of the returns as net returns. Some active fund managers can charge quite substantial fees which reduces the net returns.
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Which US stocks does it own?
The ETF is invested in many of the world's strongest and most recognised businesses.
We're talking about global juggernauts including Apple, Microsoft, Amazon.com, Nvidia, Alphabet, Berkshire Hathaway, Tesla, Meta Platforms¸ Exxon Mobil, Johnson & Johnson, Visa, Procter & Gamble, Mastercard, PepsiCo, Coca-Cola, Pfizer, Costco, McDonald's and Walmart.
While all of these businesses are listed in the US, I think it's important to recognise that they generate their earnings globally. But, iShares S&P 500 ETF could be a better way to get exposure to regions like Asia and South America than owning businesses from those regions because the businesses within the ETF are extremely strong.
I think these US stocks are great.
But, we need to remember the way that an ETF acts as a trust structure means that all of the dividends they receive are passed onto investors of the ETF's units. So, the ETF's underlying dividend yield is influenced by the dividend yield of the businesses.
The distributions from iShares S&P 500 ETF can be boosted by capital gains within the portfolio if there are any sales that made a profit.
But, fundamentally, the passive income of an ETF relates to the dividend yields of the businesses involved.
Is the dividend yield of iShares S&P 500 ETF good for passive income?
The long-term return of the ETF has been very good as these businesses have grown earnings and re-invested a healthy amount of that profit back into more growth.
Some of the biggest businesses don't pay a dividend at all, such as Amazon.com, Alphabet and Berkshire Hathaway.
Most of the US businesses that I mentioned above don't typically have a high dividend payout ratio, and most of them have a relatively high price/earnings (P/E) ratio, so the dividend yield for those businesses is lower.
This results in the iShares S&P 500 ETF having a relatively low dividend yield. According to Blackrock, the 12-month trailing dividend yield as at 31 March 2023 was 1.31%.
So, while I think the ETF offers investors plenty of positives, the passive dividend income is not one of the standouts at all. It would probably be better to go for ASX dividend shares for income-seeking investors.
