Does the iShares S&P 500 ETF (IVV) pay passive income?

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The iShares S&P 500 ETF (ASX: IVV) is one of the most popular exchange-traded funds (ETFs) on the ASX. It's well known to deliver capital growth over the long term, but some investors may also be interested in whether the investment can provide passive income.

The IVV ETF is aligned to the S&P 500 Index (SP: .INX) and gives investors exposure to 500 of the largest and most profitable businesses listed in the United States.

Most readers have probably heard of the IVV ETF's largest holdings, including Apple, Microsoft, Nvidia, Amazon.com, Alphabet, Meta Platforms, Tesla, Broadcom and Berkshire Hathaway.

Impressively, the IVV ETF has delivered an average annual return of 16.2% over the past decade, thanks to the strong returns of those technology businesses. As you can imagine, dividend income was not a substantial part of that return, but some dividend income has been sent investors' way.

Investors can visit the Blackrock website at any time to gain the latest information on the ASX ETF's dividend yield.

As of 17 December 2024, the iShares S&P 500 ETF had a 12-month trailing dividend yield of almost 1%. In other words, the dividends paid by the ETF over the last 12 months amount to a dividend yield of close to 1% at the current IVV ETF unit price.

At a time when Aussies can get a term deposit with a 5% interest rate, a 1% dividend yield may not seem appealing at all.

If I were looking specifically for income, this fund wouldn't be one of the most attractive choices.

An ASX ETF's dividend yield is largely dictated by the dividend yields of the underlying investments because an ETF passes on the dividends it receives from its underlying holdings.

The iShares S&P 500 ETF's holdings are weighted towards companies with low dividend yields, such as Nvidia, Alphabet, Meta Platforms, and Microsoft.

Why do those companies have low yields? I'd put it down to two factors.

First, they have lower dividend payout ratios because they keep more of their generated profit to invest in future growth initiatives.

Second, these businesses are trading at high valuations. The higher the price/earnings (P/E) ratio, the lower the dividend yield. For example, if a share price doubles, then the dividend yield halves (assuming the dividend payment in dollar terms doesn't change).

In recent years, we've seen these tech companies deliver enormous capital growth, which has lowered the dividend yield.

Ultimately, a dollar of investment returns is worth a dollar, whether it comes from capital gains or dividends.

Investors can choose what sort of investments they want to own, but the IVV ETF has proven to be a strong wealth-builder for investors. We can sell (a small portion of) our investment to generate cash flow too, rather than relying on dividends for that cash.

I think the IVV ETF is a strong option for getting low-cost access to high-quality global businesses that could continue delivering strong performance.