Why this is the best income ASX ETF for retirees

Australian investors, particularly those approaching retirement, often choose to target equities that generate passive income. 

This is often done using dividend shares, or dividend paying ASX ETFs. 

The trade off for many investors when targeting passive income is missing out on strong capital gains.

However there is one fund that stands out as being able to offer both. 

ASX leads global dividends

Some investors may not realise that Australia has historically offered some of the highest average dividend yields in the world. 

As of December 31, 2024, the trailing 12-month dividend yield of the S&P/ASX 300 Index (ASX: XKO) was approximately 3.5%.

According to research from S&P Global, this outpaced Europe, Canada and the US. 

However it is worth noting it’s significantly lower than its long-term average of approximately 4.5%.

According to Vanguard, Australia’s affinity with equity markets and our higher than the global average dividend rate, means that many investors look to shares for that income. 

But often there is a trade-off to be made between income and growth.

The exception to this rule is the Vanguard Australian Shares High Yield ETF (ASX: VHY). 

ASX ETF overview

The Vanguard Australian Shares High Yield ETF seeks to track the return of the FTSE Australia High Dividend Yield Index. 

According to Vanguard, it currently yields around 5% per annum (paid quarterly) – even higher when including franking credits. 

That means a $100k investment in this ASX ETF would have paid roughly $5,000 annually in distributions, before franking – a robust income source for retirees or income-focused investors.

Passive income and growth 

What stands out about this fund, is it has also generated strong growth alongside consistent dividends. 

It has delivered about 9–10% total return per year over the last 5 years, closely matching the overall Australian share market’s performance while outpacing many dedicated “high-income” funds. 

Notably, VHY’s total return (income + price appreciation) has surpassed the pure income strategies of some competitors. By contrast, VHY provided ample income and share-price growth, helping investors’ portfolios grow more over time.

This combination of passive income and growth is thanks to the underlying fund strategy.

VHY follows a transparent index-based strategy: it tracks the FTSE Australia High Dividend Yield Index, dividend-paying Australian companies. This rules-based approach ensures the fund consistently tilts toward above-average yielders while avoiding subjective stock picks.

The result is a straightforward, “core” equity income holding for clients – easy to understand and explain. In contrast, some income-focused peers use complex active tactics (e.g. rotating stocks around ex-dividend dates or writing call options for extra income).

Importantly for investors, the fund also comes with an annual fee of just 0.25%.

The post Why this is the best income ASX ETF for retirees appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Bell has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Vanguard Australian Shares High Yield ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.