The Vanguard MSCI Index International Shares ETF (ASX: VGS) is one of the most popular exchange-traded funds (ETFs) on the ASX, with the ETF worth $5.1 billion at last count. But, could it be a good source of dividends with franking credits?
I think it's important to remember how an ETF operates. The ETF just delivers the return of the underlying investments. ETFs also pass through all of the investment income they receive from the underlying businesses.
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What shares does the Vanguard MSCI Index International Shares ETF own?
This investment seeks to track the return of the MSCI World Ex-Australia Index. The idea is that it provides exposure to many of the world's "largest companies listed in major developed countries. It offers low-cost access to a broadly diversified range of securities that allows investors to participate in the long-term growth potential of international economies outside Australia".
Due to the size of the United States businesses, all of the biggest holdings are US listings.
Let's look at the top 10 holdings at the end of October 2022: Apple, Microsoft, Alphabet, Amazon.com, Tesla, UnitedHealth, Exxon Mobil, Johnson & Johnson, Berkshire Hathaway and JPMorgan Chase.
But, the holdings come from a number of countries including Japan, the United Kingdom, Canada, France, Switzerland, Germany, the Netherlands, Sweden, Spain, Italy, Denmark, Singapore and so on.
Are VGS dividends fully franked?
It's important to recognise that the ETF excludes Australian shares from its investment portfolio.
Franking credits are only generated and paid by companies that are part of the Australian taxation system. This means that the ETF doesn't invest in any ASX shares that generate/pay franking credits.
So, not only are the distributions paid by Vanguard International Shares ETF not fully franked, they're not franked at all.
What's the dividend yield of the Vanguard International Shares ETF?
After the 12% drop in the unit price in 2022 date, the dividend yield has seen a boost. But, it's still fairly low.
According to Vanguard, the ETF has a dividend yield of 2.1%. The ETF pays quarterly, though the distributions aren't split evenly every quarter because the underlying businesses themselves don't pay equal dividends each quarter or half-year.
But, if the underlying businesses are collectively growing their dividends to investors, then the ETF can grow its income distribution over time as well.
Snapshot of recent movements
The Vanguard International Shares ETF has gone up by 7% since the end of September 2022.
