Does the VanEck Wide Moat ETF really have an 8% dividend yield?

Is an 8% dividend yield too good to be true?

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Late last month, we covered the latest dividend news from the VanEck Morningstar Wide Moat ETF (ASX: MOAT). MOAT's investors would have been delighted with the announcement that this exchange-traded fund (ETF) intends to pay a dividend distribution of $9.73 per unit later this month.

Now the VanEck Wide Moat ETF only pays out one dividend distribution every year, unlike the biannual schedule that is the norm on the ASX. But even so, this latest dividend is a monster.

At market close on Friday, the MOAT unit price is sitting at $112.04, down 0.21%. At this pricing, this upcoming dividend distribution would result in a whopping dividend yield of 8.68%.

Now, this isn't really a fair metric to use since the MOAT ETF already traded ex-dividend for this upcoming distribution on 1 July. But even if we use the closing share price of $124.47 (which is where MOAT units closed at on 30 June), we get a dividend yield of almost 8%. 7.82% to be precise.

This seems rather unusual at first glance. After all, the VanEck Wide Moat ETF isn't some dividend-focused fund holding income heavyweight shares like Westpac Banking Corp (ASX: WBC) or Telstra Group Ltd (ASX: TLS).

It is a US-centric ETF that specialises in holding American companies with wide economic moats.

Sure, its holdings include a few dividend payers. You'll currently find the likes of Pfizer, Campbell Soup, Altria and Starbucks in MOAT's portfolio. But most of these shares don't pay substantial dividends. At least by ASX standards. In fact, US stocks, in general, are famous for their low dividend income potential compared to other stock markets around the world.

So how did the MOAT ETF just pay out a near-8% dividend yield?

How does the Wide Moat ETF have such a massive ASX dividend?

Well, passing on the dividends of its underlying holdings is only one way that an ETF can fund a dividend distribution payment. The other way is by selling off shares in its portfolio and paying out the proceeds to investors.

The Wide Moat ETF is structured as an equal-weight ETF of sorts. This means that is it designed in such a way that all of MOAT's holdings occupy the same weighting in the ETF. This is in contrast to most index funds. These funds usually give the larger shares in the portfolio a higher weighting.

Every time VanEck rebalances MOAT's portfolio (typically every six months), it must sell off any shares that have appreciated since the last time the ETF was rebalanced, and thus grown above their allocated weighting in the fund's portfolio.

Let's assume that MOAT's portfolio has had a successful six months. Which it has. In this scenario, we might find that a lot of portfolio pruning needs to be done to return its successful holdings to their required weighting.

Over the past six months, it appears that the VanEck Wide Moat ETF has experienced a significant increase in cash due to rebalancing. As a result, the ETF was able to use this surplus to fund a substantial dividend distribution.

But MOAT's ASX investors shouldn't get too comfortable with receiving such a large dividend paycheque. Sure, the VanEck Wide Moat ETF can make it rain when times are good. But if its holdings don't perform too well going forward, those monstrous dividends will quickly dry up.

Motley Fool contributor Sebastian Bowen has positions in Altria Group, Starbucks, Telstra Group, and VanEck Morningstar Wide Moat ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Pfizer and Starbucks. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool Australia has recommended Starbucks and VanEck Morningstar Wide Moat 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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