ASX-listed exchange-traded funds (ETFs) can be wonderful buys for passive investing. But, they can also be strong picks for dividend income.
Some of the most popular ETFs aren't known for their passive income because their underlying holdings don't pay much income either. ETFs act as conduits for the dividends they receive and pass them onto investors.
The two ETFs I'm going to talk about have the potential to pay solid starting yields and can also deliver capital growth because of the growing earnings of the underlying businesses.
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Magellan Global Fund – Open Class Units (ASX: MGOC)
This is one of the largest ETFs on the ASX and is managed by the listed fund manager Magellan Financial Group Ltd (ASX: MFG).
There are a few different objectives for this ETF.
It's trying to deliver "attractive risk-adjusted returns over the medium-to-long-term, while reducing the risk of permanent capital loss."
It aims to deliver net returns of 9% per annum, net of fees, over the economic cycle. Magellan also wants investors to receive a target distribution of 4% per annum.
One of the advantages of this ASX ETF is that it invests in many of the world's best businesses and has a sizeable allocation to them.
Currently, it has a weighting of at least 4% in the following businesses: Microsoft (7.2% allocation), Amazon (7.1%), SAP (5.1%), Intercontinental Exchange (4.7%), ASML (4.5%), UnitedHealth (4.4%), Apple (4.3%), Meta Platforms (4.1%), Intuit (4%) and Netflix (4%).
I like that the fund can provide exposure to all of those great stocks while aiming for a solid yield. The MGOC ETF targets a distribution yield of 4%. Due to the fund's recent capital growth, the last two payments equate to a 3.3% distribution yield.
Betashares FTSE 100 ETF (ASX: F100)
The global share market seems to have fallen out of love with UK stocks, which has meant plenty of quality businesses are now trading at low price-earnings (P/E) ratios.
The lower the P/E ratio, the higher the dividend yield. This helps the overall dividend yield of the UK share market, which we can access via the F100 ETF.
Many of the portfolio's biggest positions are known for their dividends. Currently, the top ten positions are Astrazeneca, Shell, HSBC, Unilever, BP, Relx, GSK, British American Tobacco, Diageo, and Rio Tinto.
In the last three years, the F100 ETF has returned an average of 11%, outperforming the S&P/ASX 200 Index (ASX: XJO).
As of 31 July 2024, the ASX ETF had a 12-month distribution yield of 3.5%. Pleasingly, the annual distribution has grown each year since 2020, though that's not guaranteed to continue.
