The iShares S&P 500 ETF (IVV) is slowly becoming a dividend powerhouse. Here's why

There are big changes afoot for dividend investors with this ASX ETF.

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ASX investors might want to buy the iShares S&P 500 ETF (ASX: IVV) for their stock portfolios for a number of reasons. It could be to gain exposure to a portfolio of stocks from outside Australia. It could be to add some of the best companies in the world to one's investing strategy.

But whatever the reason ASX investors might want to buy this exchange-traded fund (ETF), it's likely that receiving dividend income isn't high on the list.

Unlike ASX shares, American stocks aren't known for their dividends. Traditionally, if an investor picks up an ASX index fund, they can expect to receive a dividend yield of around 3%-5% from their investment, depending on where we are in the market cycle. Thanks to dividend heavyweights like Westpac Banking Corp (ASX: WBC) and BHP Group Ltd (ASX: BHP) amongst their top holdings, ASX index funds are usually generous when it comes to income.

But the same isn't usually said about American shares. Thanks to a different tax system, as well as the general makeup of the US markets, American stocks have never prioritised paying out dividends to the same extent as their Australian counterparts. So while it's normal to get a 3%-5% yield from an ASX index fund, a US index fund is far more likely to get you a dividend yield of between 1% and 2%.

We can see this playing out today. Right now, the iShares S&P 500 ETF is trading on a trailing dividend distribution yield of 1.21%. That comes from this ETF's last four quarterly dividend distribution payments, which add up to an annual total of 66.19 cents per unit.

But despite this, I'm starting to think that the iShares S&P 500 is slowly morphing into a dividend powerhouse.

Why? Well, because its top holdings, which were previously (and conspicuously) not dividend payers, are slowly changing course.

Big dividend changes for ASX investors in the IVV ETF

Right now, the ten largest shares in the iShares S&P 500 ETF are as follows:

  1. Microsoft Corporation (NASDAQ: MSFT)
  2. NVIDIA Corporation (NASDAQ: NVDA)
  3. Apple Inc (NASDAQ: AAPL)
  4. Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL)
  5. Inc (NASDAQ: AMZN)
  6. Meta Platforms Inc (NASDAQ: META)
  7. Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B)
  8. Eli Lilly and Co (NYSE: LLY)
  9. Broadcom Inc (NASDAQ: AVGO)
  10. JPMorgan Chase & Co (NYSE: JPM)

Of these ten companies, none except JPMorgan currently offer a dividend yield of over 2%. And four don't even pay a dividend. Well, at least until 2024.

This year, both Meta Platforms and Alphabet announced that they would be breaking with a long tradition of not paying a dividend by initiating a maiden shareholder payment. That leaves only Berkshire Hathaway and Amazon as the last holdouts in this top ten.

Sure, most of these stocks don't have impressive upfront yields. But consider this: Microsoft has been growing its dividend by a compounded annual growth rate of 10.23% per annum over the past five years. For Nvidia, it's 6.91%, and in Broadcom's case, 15.97%.

Now that Meta and Alphabet have finally started paying out dividends, it's highly likely that these companies will also grow their payouts at a high rate in the years ahead, thanks to the mountains of cash these companies generate.

As such, I am seeing more dividend income potential for an IVV investment on the ASX today than at any other time in recent history.

It might have a low yield right now. But I think there's a great chance that anyone who buys this ASX ETF today will be bagging a lot more income down the road.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Motley Fool contributor Sebastian Bowen has positions in Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, and Microsoft. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Berkshire Hathaway, JPMorgan Chase, Meta Platforms, Microsoft, Nvidia, and iShares S&P 500 ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Broadcom. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, Microsoft, Nvidia, and iShares S&P 500 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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