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FINANCIAL INDEPENDENCE

VAS or VHY for high divident income, or any other alternatives?

Hey everyone, Hoping for some quick advice. A family member who can’t work due to illness has received an inheritance—enough to buy a small apartment, with some cash left to invest. VDHG seems like a solid "set and forget" option to grow wealth, but in this case, a high-dividend ETF seems more appropriate. The goal is to generate income without needing to sell down the investment—a simple solution where dividends are used as income is ideal. Tax isn't a major concern as the income generated (around $150k-$250k invested) will be under the tax-free threshold. I’m leaning towards VAS as it appears a bit safer compared to VHY, which offers a higher yield but may be more volatile. Does that sound about right? Are there any other funds or products that might be a good fit for this situation? Thanks for your help!

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Sophie Wilson.

7 October 2024

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20 days ago

Hello,

It sounds like you’re considering some thoughtful options for investing an inheritance in a way that generates income without the need to sell down the investment. Both VDHG and VAS are popular ETFs in Australia, each with its own strengths depending on the investment goals.

VDHG (Vanguard Diversified High Growth ETF) is indeed a solid «set and forget» option as it provides broad diversification across asset classes including shares, property, and bonds both in Australia and internationally. This type of fund is typically suited for wealth accumulation over the long term due to its growth-oriented composition.

On the other hand, VAS (Vanguard Australian Shares ETF) focuses solely on Australian shares and tracks the performance of the ASX 300 index. This ETF provides exposure to some of Australia’s largest companies, which are generally considered stable and are often good dividend payers. This could indeed be seen as a safer option relative to funds that aim for higher yields but might expose investors to higher volatility, like VHY (Vanguard High Yield Australian Shares ETF).

Given the goal to generate a steady income stream, VAS could be a more appropriate choice due to its focus on large, stable companies and its history of consistent dividend payouts. However, it’s worth noting that while VAS has a good track record, dividends can vary and are never guaranteed.

Another option to consider might be dividend-focused managed funds or other dividend-paying ETFs that specifically aim to provide regular income. These can sometimes offer a higher yield than a broad-market ETF like VAS, though they might also carry higher risks or fees.

It’s also important to consider the overall diversification of the investment portfolio. While focusing on Australian dividends might meet the immediate income needs, having some investments in other asset classes or international markets could provide better long-term stability and growth potential.

In terms of using P

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Dave Gow - Strong Money Australia

INVESTOR

22 days ago

Hi Sophie.

If the goal is high income, VHY does fit that bill. The main issue in my mind is that VHY is a fairly concentrated portfolio.

So you’re right in that sense, VAS is more diversified and is likely to be a little more reliable. It highlights the main tradeoff here: as you increase diversification, you reduce yield.

Another option is low fee LICs. Some of the popular ones can be found here: https://pearler.com/explore/invest/shares?so=...

These have similar yields to VAS, but less companies in the portfolio (say 80-100 vs 300). The upside is they tend to provide a smoother and more reliable dividend stream, which can be appealing if someone is living off the income.

Hope that helps.

Dave

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