Reliable dividend income and high yields are hard to come by in today’s low interest rate environment. Could the Vanguard Australian Property Securities Index ETF (ASX: VAP) be the solution?
What’s inside the VAP ETF?
VAP is the largest (and cheapest) Australian property ETF listed on the ASX. Launched in 2010, this ETF holds a portfolio of 30 real estate investment trusts, or REITs. Some of these REITs are likely familiar names, such as Goodman Group (ASX: GMG), Scentre Group (ASX: SCG) or Stockland Corporation Ltd (ASX: SGP).
These REITs own property across a multitude of sectors, including industrial, retail, office and residential.
Why should I own REITs?
There are a number of reasons why an investor might want exposure to real estate through an ETF like VAP. First of all, getting direct property exposure (through something like an investment property) can be extremely expensive when you factor in things like deposits, stamp duty, lender’s mortgage insurance (LMI), maintenance, etc. Even if an investor can cover these costs, they may only be able to buy one property, essentially putting all their eggs in one basket.
REITs allow an investor to gain exposure to Australian real estate through a diversified portfolio for a fraction of the cost. But why should you care about property at all?
Well, most investors are not looking at REITs for capital growth (although there is potential for long-term share price growth). The most appealing aspect of REITs is usually the dividend income. REITs pay regular distributions to investors from the rent they collect from their tenants.
Keep in mind, the properties we’re talking about are things like office buildings and shopping centres, so many of the tenants are often big corporations with a pretty reliable record of paying their rent on time. The best part is, many of these tenants have signed long-term contracts with scheduled rent increases to ensure that inflation doesn’t eat into the returns for investors.
VAP currently offers a trailing yield of 4.97%, which is a whole lot more than what you would get from most bond ETFs or a high-interest savings account. But keep in mind, that’s a historical dividend yield — so recent rental reductions (if any) or overdue payments could mean that yield is lower in the future.
Fees and risks
VAPs healthy dividend does not come free, and there are costs and risks to consider.
Vanguard charges a management fee of 0.23% per year, which is the lowest fee for an Australian property ETF but still considerably higher than, say, the BetaShares Australia 200 ETF (ASX: A200), which also boasts an appealing dividend yield.
Second, there are many risks to consider. While VAP offers a higher yield than a bond ETF, such as iShares Core Composite Bond ETF (ASX: IAF), it also comes with higher volatility and greater potential for capital loss. Over the last 12 months, for example, VAP is down around 17%. When considering VAP for your portfolio, think of it as an income-producing asset but don’t confuse it with a defensive asset.
VAP, and REITs in general, have a high correlation to the broader Australian share market, so if the market drops it’s likely that VAP is dropping with it.
So, if you’re considering adding VAP to your diversified portfolio, make sure you understand its function and be prepared to hold it for the long term and expect to have to weather some short-term volatility.
To see our full report on VAP click here.