Can Vanguard ASX Index Funds Help Build Retirement Dividend Income?

The asset manager Vanguard provides a variety of attractive ASX index funds that can contribute to a substantial level of annual dividend income by the time of retirement. 

One significant advantage of Vanguard is its commitment to maintaining low costs for its investment products. Unlike traditional asset management firms that have institutional shareholders focused on increasing profits, Vanguard operates on a unique model where the investors in its ETFs and other products are the actual owners. This structure allows Vanguard to share profits through reduced fees, creating a cost-efficient investment option for participants. 

While index funds on the ASX may not immediately come to mind as suitable for generating retirement dividend income, two particular options stand out as viable candidates. 

Vanguard Australian Shares Index ETF (ASX:VAS) 

The Vanguard Australian Shares Index ETF aims to track the S&P/ASX 300 Index, which encompasses the 300 largest companies listed on the ASX. This includes major corporations such as Commonwealth Bank of Australia (ASX:CBA), BHP Group Ltd (ASX:BHP), and CSL Ltd (ASX:CSL). 

The larger businesses within the VAS ETF portfolio are recognized for their substantial dividends, supported by relatively high dividend payout ratios. Noteworthy companies within this fund include National Australia Bank Ltd (ASX:NAB), Westpac Banking Corp (ASX:WBC), Woodside Energy Group Ltd (ASX:WDS), and Telstra Group Ltd (ASX:TLS). Vanguard reports that the VAS ETF currently offers a dividend yield of 3.5%, enhanced by franking credits. 

Since its inception in May 2009, this Vanguard ASX index fund has achieved an average annual return of 9.2%. This strong performance combined with its attractive yield makes VAS an appealing choice for those focused on building wealth through dividends. 

Vanguard MSCI Index International Shares ETF (ASX:VGS) 

The Vanguard MSCI Index International Shares ETF tracks the performance of the MSCI World ex-Australia Index, which represents a comprehensive view of the global share market, including companies listed in various developed countries. 

This ASX ETF is particularly attractive because it provides wide exposure to the global economy, featuring over 1,360 positions across multiple markets. It includes not only American companies but also those from Japan, the UK, Canada, France, Switzerland, Germany, the Netherlands, and Denmark. 

The VGS ETF grants exposure to renowned companies like Apple, Microsoft, Nvidia, Alphabet, Amazon, and Meta Platforms, among others. Since its launch in November 2014, this fund has generated an impressive annual return of approximately 13%, although its dividend yield stands at 1.7%. 

Creating Substantial Dividend Income by Retirement 

While predicting the future returns and dividend yields of these ASX-listed index funds remains uncertain, a strategy involving consistent contributions to both funds could yield favorable outcomes. The historical average return between these two funds hovers around 11%. By contributing monthly to both, significant growth can be achieved over time. For instance, an investment of $750 per month with an annual growth rate of 11% could lead to a considerable accumulation of wealth over a 30-year period, according to calculations based on compound interest principles.  

Currently, the combined average dividend yield of the two funds is approximately 2.6%, although there is potential for this figure to increase in the future. If a balance of substantial wealth achieved through monthly contributions generated a dividend yield of 2.6%, this could translate to significant annual dividend income upon retirement. The prospect of achieving such income through disciplined contributions and the benefits of compound growth presents a compelling opportunity for those planning for retirement.