Are Vanguard Australian Shares ETF (VAS) dividends fully franked?

The Vanguard Australian Shares Index ETF (ASX: VAS) is one of the most popular exchange-traded funds (ETFs) in Australia. It’s also paying out sizeable dividends every quarter to investors. Are those dividends fully franked?

For investors that don’t know what this investment is, it’s an ETF that’s provided by Vanguard, one of the world’s biggest providers of cheap investment funds.

ETFs allow investors to buy a whole bunch of businesses in just one investment. This particular fund tracks the S&P/ASX 300 Index (ASX: XKO), being 300 of the biggest businesses in Australia.

What are franking credits?

Australia has a generous tax system that enables Australian tax residents to benefit from a refundable tax offset to reduce their taxes owed when they receive dividends.

Companies pay tax and then when a dividend is paid, the franking credits are attached. This either reduces the amount of income tax owed on the dividend or excess franking credits are refunded after taxpayers complete their tax return.

As investors get those dividends, they learn whether the dividend is fully franked or not.

Only Aussie companies that operate within the Australian tax system generate franking credits. Non-Australian businesses may pay unfranked dividends. Businesses operating in a trust structure don’t produce franking credits, though they can pass them on if they receive a dividend.

If a company made some of its profit in Australia and some overseas, its Australian profit may not generate enough franking credits to make the dividend fully franked – it may only be partially franked. For example, 80% of the dividend may have franking credits, or 60% of it, or whatever the percentage ends up being.

How this applies to the Vanguard Australian Shares ETF

As an ETF, this investment passes through the income it receives.

Some of the investment income it receives is fully franked, like the dividends from Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP) and Woodside Energy Group Ltd (ASX: WDS).

But, there are also plenty of examples that don’t pay fully franked dividends, like Macquarie Group Ltd (ASX: MQG), CSL Limited (ASX: CSL) and Transurban Group (ASX: TCL).

The level of franking changes every quarter – based on what dividends it has received that quarter – but it doesn’t pay fully franked dividends/distributions because not every single dividend and distribution that it receives is fully franked. But, historically, the level of franking is usually at least 50% or higher.

What’s the current dividend yield?

The combined dividend yield of the shares that the Vanguard Australian Shares ETF owns at the end of September 2022 was 4.8%, excluding the franking credits.

The post Are Vanguard Australian Shares ETF (VAS) dividends fully franked? appeared first on The Motley Fool Australia.

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More reading

• 2 ETFs for ASX investors to buy for big dividends
• These 10 predictions could help you profit from the stock market regardless of inflation, interest rates or even another bear market
• How regularly does the Vanguard Australian Shares ETF (VAS) pay dividends?
• Is the Vanguard Australian Shares ETF fighting off inflation?
• Why did the Vanguard Australian Shares Index ETF perform strongly in October?

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 CSL Ltd. The Motley Fool Australia has recommended Macquarie Group Limited. 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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