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Is the Vanguard VGS ETF a good idea for dividends?

Can a global share fund be a good option for dividends?

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Tristan Harrison
Author Bio Tristan Harrison has a decade of experience as an ASX share investment writer and was previously a business, tax and audit accountant for seven years. Tristan has contributed to The Motley Fool since October 2016. He has an advanced diploma from the Association of Accounting Technicians and is currently enrolled in the Chartered Institute Management Accountant (CIMA) program. Tristan's goal is to help Australians learn about great ASX shares that can help grow their portfolio, wealth and dividends over the long-term. Areas of Expertise ASX dividend shares and passive income strategies ASX growth shares and ETFs Business and company financial analysis Franking credits and personal tax topics Personal finance Education Advanced diploma from the Association of Accounting Technicians Enrolled in the Chartered Institute Management Accountant (CIMA) program Social Media X/Twitter Favorite Investment Quote "Live within your income and save so that you can invest." — Charlie Munger
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Key points
  • The VGS ETF is a dividend-paying investment fund 
  • However, Vanguard says the yield is only 2.1% 
  • The yield is decided by the underlying yields of its investments in businesses like Apple and Microsoft 

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).

ETF written on coloured cubes which are sitting on piles of coins.

Image source: Getty Images

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.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Meta Platforms, Inc., Microsoft, Nvidia, Tesla, and Vanguard MSCI Index International Shares ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Johnson & Johnson and UnitedHealth Group and has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Meta Platforms, Inc., Nvidia, and Vanguard MSCI Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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