Share investors at the moment can receive cash refunds if their franking credits exceed their tax payable. The Australian Labor Party (ALP) wants to eliminated these tax refunds if they are elected to federal government next year. The dividend imputation system was introduced to avoid double taxation where the company already pays 30 percent tax on income. Tax payers who pay little tax will be most affected by this change. Self-managed Super Funds are currently exempt from tax when they are in pension phase. Hence these super funds have been benefiting from franking credits as they receive cash refunds if their franking credits exceed more than the tax payable. If the ALP win government and succeed in introducing these changes, then some investors will be worse off. Below are some ideas of how to get good yield on your portfolio if franking credits are eliminated.
Corporate Debt
Government bonds are currently delivering very low yields so investors are looking elsewhere for a better yield. Retirees looking for high yielding investments should think about investing in high yielding corporate bonds. Investors can find corporate bonds which yield between 5.3 per cent to 8.5 per cent. There are also managed funds out there which specialise in corporate bonds. Alternatively, investors can purchase corporate bonds through an ETF.
Real Estate Investment Trusts
REITs are a vehicle where investors can own a diversified property portfolio without having the hassles of actually managing the physical property. REITs generate income from rent they collect from their property and this income is distributed to investors. REITS typically do not pay franked dividends as tax is paid on an individual tax payer level rather than fund level. These investments must distribute 90% income of their income to investors so investors looking for income so consider these instruments.
Growth Stocks
Retirees usually look for stocks with income to support their living expenses and over look growth stocks. As mentioned in our previous article “Investing for income? You are doing it all wrong” growth stocks can, over time, become high yielding. Over the course of 5 years growth stocks can make dividend payments higher than typical income stocks. However, if you cannot wait for these growth stocks to increase in income, then you can simply sell a portion of the stock which you need income from. If you are in the pension phase then the capital gains made on this stock will be tax free. Therefore, you have received income without franking credits.
High yielding shares with unfranked dividends
There are stocks in the market which are high yielding but are unfranked. One example is the utility stock of Spark Infrastructure Group (ASX:SKI) which has a dividend yield of 6.96% and no franking. The energy stock Whitehaven Coal (ASX:WHC) has dividend yield of 6.41% and no franking. There are also ETFs in the market which focus on high dividends and low franking or investment funds where yield is the primary objective.
International shares
International shares do not have franked dividends so investors should consider this if franking credits are eliminated. It also diversifies the portfolio shares so the investor’s exposure is not restricted to the Australian market. Investors can also Invest in EFTs that invest in global shares if they prefer not to buy international shares directly.
Lauren Hua is a private client adviser at Fairmont Equities.
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