One of the most appealing reasons to own the Vanguard Australian Shares Index ETF (ASX: VAS) is the dividend income that the ASX exchange-traded fund (ETF) provides.
ETFs pass through the dividends they receive from the fund's investments onto the ETF's investors. So, if the fund's underlying holdings have sizeable dividend yields, then it's likely the ETF will have a rewarding dividend yield as well.
The VAS ETF owns a large number of ASX shares that pay high dividend yields, including Rio Tinto Ltd (ASX: RIO), National Australia Bank Ltd (ASX: NAB) and Telstra Group Ltd (ASX: TLS). That's why, according to Vanguard, the VAS ETF had a dividend yield of 3.5% at the end of July 2024. For an ETF, that's a relatively high dividend yield.
However, I prefer a few other ASX ETFs even more for income than the VAS ETF for a few different reasons. There's one ETF in particular I want to tell you about today, called Betashares FTSE 100 (ASX: F100).
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More diversification
When I look at the VAS ETF holdings, around half of the portfolio is invested in just two sectors: ASX bank shares and ASX mining shares. Add in healthcare shares and that accounts for around 60% of the fund's portfolio from just three sectors.
The F100 ETF is invested in 100 of the largest businesses on the UK share market. Five sectors have double-digit weightings in the F100, including financials (19.7% of the portfolio), consumer staples (17%), industrials (14.2%), healthcare (12.8%), and energy (12.7%).
The F100 ETF's top holdings list is not dominated by banks like the ASX is. Currently, the biggest ten positions are: AstraZeneca, Shell, HSBC, Unilever, BP, GSK, Relx, British American Tobacco, Diageo, and London Stock Exchange Group.
Stronger returns
In my opinion, the larger UK companies generally offer more global earnings growth potential than the ASX's largest businesses. When companies are growing earnings and regularly investing for more growth, the market can send the share prices of those businesses up over time.
I think the dynamic I just described above is playing out, with the F100 ETF portfolio generating stronger returns than the VAS ETF.
The F100 ETF has returned an average return of 10.2% and 7.9% per annum over the past three and five years, respectively. That compares to average returns for the VAS ETF of 7.1% per annum in the last three years and 7.5% per annum in the past five years.
Solid dividend income
The F100 ETF distribution per unit has also been steadily growing over the last few years. The fund pays a distribution every six months, and I'm going to outline the progress of the distribution paid in July.
In July 2020, the distribution was 12.4 cents per unit.
In July 2021, the distribution grew to 14.6 cents per unit.
In July 2022, the distribution increased to 16.5 cents per unit.
In July 2023, the distribution rose again to 17.5 cents per unit.
In July 2024, the distribution grew to 23.8 cents per unit.
There's no guarantee that the distribution will increase by another 92% over the next four years or achieve even half as much growth. But I think it has demonstrated that the underlying businesses are providing dividend growth.
According to BetaShares, the trailing distribution yield of the F100 ETF is currently 3.5%, which I'd call a solid starting point and similar to the VAS ETF.
