Does the Vanguard MSCI Index International Shares ETF (VGS) pay dividends?

Does this popular investment provide passive income?

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The Vanguard MSCI Index International Shares ETF (ASX: VGS) is a leading exchange-traded fund (ETF) that offers exposure to the global share market. However, it is not known for dividends.

It has proven effective at delivering capital growth over the long term. As the chart below shows, in the past five years, the VGS ETF unit price has risen by 64%.

It provides exposure to many of the world's largest companies that are listed in major developed countries. It tracks the return of the MSCI World ex-Australia Index. The idea is that it offers low-cost access to a broadly diversified range of shares, which enables investors to participate in the long-term growth potential of international economies outside Australia.

The VGS ETF has an annual management fee of 0.18%, which is cheap, in my opinion.

It's invested in more than 1,300 businesses from across the world in places like the US, Japan, the UK, Canada, France, Switzerland, Germany and the Netherlands.

Some of its biggest positions include Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta Platforms, Broadcom and Tesla.

Does the Vanguard MSCI Index International Shares ETF pay dividends?

The purpose of an (ASX) ETF is to invest in the businesses that the index or fund manager decides.

The VGS ETF acts as a conduit for the passive income that it receives. So, if the underlying businesses pay dividends or distributions to shareholders, then the ETF receives that money and passes it onto unitholders.

This fund pays a distribution to investors every three months, sending them whatever income it has received.

In July 2024, the fund paid a distribution of 218.13 cents.

In April 2024, it paid a distribution of 100.29 cents.

In January 2024, it paid a distribution of 55.3 cents.

In October 2023, it paid a distribution of 67.19 cents.

Is the VGS ETF a good option for dividends?

An ETF's distribution consists of two elements: dividends and crystallised capital gains, which can be variable from year to year.

According to Vanguard, the dividend yield of the Vanguard MSCI Index International Shares ETF is 1.7%. That's certainly not high. But over the past three years, the fund has paid an average distribution of 2.74% per annum.

The underlying holdings largely decide the fund's dividend yield, and many of the VGS ETF's holdings have a low dividend yield because they're priced for growth and investing for growth (with a relatively low dividend payout ratio).

However, I think the best reason to own this fund is the potential total returns. Past performance is not a guarantee of future performance, but since its inception in November 2014, it has delivered an average annual return of 13.2%.

Suzanne Frey, an executive at Alphabet, 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. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, 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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