Investing in a simple index fund is one of the easiest and lowest-risk ways of generating a steady passive income via dividends as well as decent capital growth.
One of the most popular index funds of the ASX is the Vanguard Australian Shares Index ETF (ASX: VAS).
The VAS exchange-traded fund (ETF) tracks the S&P/ASX 300 Index (ASX: XKO). It is the largest ETF in Australia, with more than $12 billion in assets under management.
The Vanguard Australian Shares ETF’s top 5 holdings are BHP Group Ltd (ASX: BHP) shares, Commonwealth Bank of Australia (ASX: CBA) shares, CSL Ltd (ASX: CSL) shares, National Australia Bank Ltd (ASX: NAB) shares, and Westpac Banking Corp (ASX: WBC).
Helpfully, these are among the biggest dividend payers of the ASX 200 large-caps, which helps make the Vanguard Australian Shares ETF a good passive income option.
How much passive income will VAS ETF shares generate?
On a trailing yield basis, the Vanguard Australian Shares ETF pays a dividend yield of 5.5% with about 80% franking.
This is based on Friday’s closing price of $88.96 per share.
If you invested $10,000 in the Vanguard Australian Shares ETF on Friday, you would have received 112 shares.
While that might not sound like a big holding, don’t let the numbers fool you. This is a decent investment and should deliver some very nice passive income.
The last annual payment made by the VAS ETF totalled $4.94 (rounded up).
That means you can expect a passive income of $553 on your VAS ETF holding of 112 shares.
Should you invest?
A dividend yield of 5.5% is perfectly solid. Most ASX 200 dividend shares pay yields of 4% to 5%, so the Vanguard Australian Shares ETF is delivering an above-average passive income in that respect.
The VAS ETF also pays its dividend distributions four times per year instead of the typical twice per year for ASX 200 shares.
Finally, whenever you invest in an index fund or managed fund, you have to consider fees.
There’s good news here.
The VAS ETF was already offering a very low fee of 0.1% per annum. But yesterday, Vanguard announced it was lowering the fee to 0.07% as of 3 July. Bonus!
