If you're an investor in the VanEck Morningstar Wide Moat ETF (ASX: MOAT), you would have just got a monstrous dividend payment.
Back on 30 June, VanEck revealed that unit-holders in the Wide Moat ETF would be receiving a dividend distribution worth an astonishing $7.56 per unit.
Given the Wide Moat ETF currently trades at $126.28 a unit (at the time of writing), this single dividend distribution translates to a trailing dividend yield of 5.99%.
So how can an exchange-traded fund (ETF) like MOAT, which exclusively covers usually low-yielding US shares, seemingly yield such a large figure?
Let's dive into that question today.
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Wide moats and big paycheques
The VanEck Morningstar Wide Moat ETF is an actively-managed fund. Instead of blindly tracking an index, MOAT holds a concentrated portfolio of around 60 American stocks. These stocks are all selected on their perceived possession of a wide economic moat. This term refers to a long-term competitive advantage that a company can possess.
It was famously used by legendary investor Warren Buffett to describe the kinds of companies he likes to invest in. This competitive advantage can come in a few different forms. It could be a powerful brand, a cost advantage in supplying a good or service to customers, or else producing a product that consumers find difficult to avoid using.
Looking at MOAT's current holdings, we can see this in action. With names like Boeing, Nike, Alphabet and Caterpillar, MOAT holds many providers of the world's most successful brands and products.
Companies that possess one or more of these wide moats can often compound their earnings and profits at above-average rates. This typically ensures strong returns for investors.
We can see this in the Wide Moat ETF's long-term returns. As of 30 June, MOAT units have delivered an average return of 15.02% per annum over the past ten years.
But what about that monstrous dividend?
Well, ETFs can usually fund dividends through two different methods. The first is by passing through any dividends the fund receives from its underlying portfolio. As we've already touched on, US stocks tend to pay out relatively low dividends compared to what is expected on the ASX.
The second is by distributing the proceeds from portfolio rebalances. MOAT gives all of its holdings in the portfolio an equal weighting. Over time, some shares outperform others, resulting in this equal weighting becoming unbalanced. MOAT rectifies this by buying more of the under-performers and selling the overachievers within its holdings to bring them back to balance every three months or so.
With this particular ETF, investors receive the proceeds from this process in the form of a single, annual dividend distribution. Obviously, over the 12 months to 30 June, VanEck had a lot of pruning to do, which explains why investors were treated to such a hefty dividend distribution this week.
So yes, this 5.99% dividend distribution yield is the real deal. However, this process is not consistent. Investors should not assume that, just because MOAT investors have enjoyed such a high payout this month, this is the norm. Next year's payment might not come even close.
But for now, MOAT investors can enjoy this large payment as the fruit of their fund's labours.
