The Vanguard MSCI Index International Shares ETF (ASX: VGS) invests in a global portfolio of shares. But could it be a good idea for dividends?
It's one of the more popular index funds. It is invested in more than 1,470 businesses in the portfolio, spread across a number of different countries including the US (70.2% of the portfolio), Japan (6.3%), the UK (4.5%), Canada (3.7%), France (3.2%), Switzerland (3%) and so on.
The ASX is known for being a dividend-friendly share market. Other share markets typically don't have as large of a dividend yield. The ASX's largest businesses mostly have low price/earnings (p/e) ratios and high dividend payout ratios, leading to a higher yield for the S&P/ASX 200 Index (ASX: XJO).
How good is the VGS ETF dividend yield?
The Vanguard MSCI Index International Shares ETF is invested in a whole range of different businesses.
Exchange-traded funds (ETFs) simply pass through to investors the dividends that they receive. The biggest positions have the biggest influence on the dividend yield.
Let's look at the top 10 holdings in the VGS ETF: Apple, Microsoft, Alphabet, Amazon.com, Tesla, UnitedHealth, Johnson & Johnson, NVIDIA, Meta Platforms and Exxon Mobil.
Some of those names don't even pay dividends, like Tesla, Amazon and Alphabet. Others, like Apple and Microsoft, do pay dividends but their p/e ratios are so high that the subsequent dividend yield is very low.
According to Vanguard, the VGS dividend yield at 30 June 2022 was 2.1%. This has been pushed a bit higher after a 16% decline in the unit price of the Vanguard MSCI Index International Shares ETF in 2022.
Dividend growth
ETFs can distribute both capital gains and dividends to investors. While capital gain distributions are somewhat unpredictable, the dividends/distributions are more predictable and can be more consistent.
Businesses like Microsoft, Apple and Johnson & Johnson have been growing their dividends over the past decade. Plenty of other businesses within the VGS ETF have also grown their dividend.
So, the underlying dividend income from Vanguard MSCI Index International Shares ETF can steadily grow. The typically good earnings growth of the underlying VGS ETF portfolio names can help fund dividend growth and also hopefully lead to decent capital growth as well, over the longer term.
