Australian dividends are a beautiful thing. A company works hard, doing something valuable for its customers, making a profit, then sending YOU – one of the owners of the business – a proportion of those profits as a dividend. Without you having to lift a finger!
But there’s one thing even better than dividends – and that’s FULLY FRANKED dividends! Not only do you get those beautiful dividends paid straight to your bank account, but you get a BONUS FRANKING CREDIT, which is usually an extra 43% of the dividend!
So what is this franking credit, and where does it come from? Let me briefly explain…
The world without franking credits:
Scenario 2 – the world with franking credits:
* Note you get the Franking Credit back when you do your tax return, not at the same time as the dividend is paid
Where this works most beautifully is if you’re in the lowest tax bracket – you don’t earn a lot of money, or you have a husband, wife or otherwise trusted partner who stays at home. For example, Frankie’s wife holds all of the Frankie Family dividend shares, and since she’s below the tax-free threshold, they get the extra Franking credit as a cash reFund every year!
Australia is a wonderful country which implemented this back in 1987. A few other countries have a similar scheme – our neighbours New Zealand, as well as Chile and Malta. Canada, Korea and the United Kingdom have a partial imputation system, and France and Germany used to have dividend imputation systems until the early 2000’s.
Frankie’s Favourite Fully Franked dividends yield around 5% to 6% on average. On a Fully Franked basis, this is a pre-tax yield of 7.1% to 8.6%! Compare that to other pre-tax yields such as money in the bank or term deposits paying less than 3%. Even property yields in Australia struggle to provide this sort of yield with such high property values.
There’s only one very tiny condition – to get the Franking credit, you need to hold the shares for a minimum of 45 days. But this is basically a non-issue for long-term investors like Frankie and his Friends.
Hopefully that help you understand the beauty of Fully Franked dividends a little better. Armed with that knowledge, feel free to check out some of my Favourite Fully-Franked Shares that I’ve bought for my own Fund!