The Betashares Nasdaq 100 ETF (ASX: NDQ) is an exchange-traded fund (ETF) with net assets of close to $3 billion. Could it be a good option for dividend investors?
The idea behind the NDQ ETF is that it invests in 100 of the largest non-financial companies listed on the US-based NASDAQ market. It includes "many companies that are at the forefront of the new economy", according to BetaShares.
Essentially, it gives investors exposure to some of the world's largest and most technologically-advanced companies invested in the United States, such as Microsoft, Apple, Amazon.com, Alphabet (Google), Nvidia, Meta Platforms and Tesla. Those holdings amount to more than 50% of the ETF's portfolio.
Image source: Getty Images
Is the NDQ ETF an option for dividend investors?
An ETF operates through a trust structure, so it essentially passes on any dividend income received from its underlying portfolio holdings to investors.
But, an ETF also distributes crystallised capital gains from any sales of its holdings, which can be a boost to the distribution yield.
Companies such as Amazon, Meta Platforms, Alphabet and Tesla don't pay dividends to investors. This suggests that the dividend yield of the Betashares Nasdaq 100 ETF is likely to be fairly low.
On top of that, some of the biggest companies that do pay a dividend have a low dividend yield – Microsoft has a 0.9% dividend yield, according to Google Finance, while Apple has a dividend yield of 0.6%.
According to BetaShares, the 12-month distribution yield at the end of April 2023 was 2.8%.
Is there a way to generate more income?
Investors could decide to sell a small amount of their NDQ ETF units and tap into the capital growth.
Before I get into an example, let me remind everyone that past performance is not a reliable indicator of future performance.
The Betashares Nasdaq 100 ETF has delivered an average return per annum of 13.6% over the three years to April 2023. Let's assume that an investor is re-investing their distributions into more NDQ ETF units.
If an investor started with a $100,000 portfolio and it grew by 13% over 12 months, they would end with a portfolio worth $113,000. The investor could then sell $5,000 and use that cash for their own life. They'd have $108,000 left in the portfolio to hopefully grow in the following year.
If we think of the $5,000 sale as a dividend of the original $100,000, that's a 5% dividend yield.
Foolish takeaway
I don't think we can say that the Betashares Nasdaq 100 ETF is a dividend option with it having a distribution yield of less than 3%.
However, I've shown a way for investors to unlock a stream of investment income from the NDQ ETF by selling a small parcel each year. The caveat is that they must have a sizeable sum to work with (such as $100,000). It wouldn't make sense to have $2,000 invested in the ETF and then sell $50 worth of units.
