The Vanguard Australian Shares Index ETF (ASX: VAS) is a popular exchange-traded fund (ETF) on the ASX. In fact, it happens to be the most popular ETF on the ASX right now.
Investors seem drawn to VAS for a number of reasons. But it's probably a safe bet that most VAS investors appreciate the simplicity of the exposure to an index of ASX shares that this ETF provides.
Now, ASX shares, and by extension the S&P/ASX 300 Index (ASX: XKO) that VAS tracks are well-known for dividend prowess. Most ASX shares that are at the top of the ASX 300 Index by weighting are formidable dividend payers.
There are the big four banks like Commonwealth Bank of Australia (ASX: CBA), of course. As well as other income heavyweights like BHP Group Ltd (ASX: BHP), Telstra Corporation Ltd (ASX: TLS) and Woodside Energy Group Ltd (ASX: WDS).
As an ETF, VAS has to pay out all dividends that it receives from its portfolio to investors within the same year of receipt in the form of distributions.
As an investor might expect from an index ETF holding so many dividend heavyweights, VAS's 12-month trailing dividend distribution yield currently stands at a healthy 7.2%.
This comes from the total of $6.26 in dividend distributions VAS has paid out over the past 12 months.
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So why are VAS's dividend distributions so erratic?
But here's where things get interesting. VAS may have paid out $6.26 in distributions over the past year, covering FY22. But over FY21, the ETF doled out a far less impressive total of $2.33 per unit. For the 12 months covering FY20, it was $2.67. For FY19, it was $3.58.
So what's going on here? How come VAS's distributions are so erratic from year to year?
Well, the answer relates to VAS's structure. As we touched on earlier, as a trust, VAS has to pay out whatever dividends come into its unitholders. As such, it can't hoard cash in a way that a company can to smooth out dividends over time.
So if ASX shares as a whole have a great year and fork out plenty of dividends, like in FY22, this will flow through to VAS' unitholders.
But if there is a dividend drought, such as the COVID-induced drought of FY21, there is less dividend income that VAS can pass through.
So the dividend distributions that VAS' investors enjoy are entirely dependent on the dividends that ASX shares themselves payout. Especially those at the top of the market like the banks and BHP.
So that's why the Vanguard Australian Shares Index ETF's dividend distributions appear so erratic. At the end of the day, VAS can only give income to its shareholders that ASX shares themselves give VAS.
