How dividends can supercharge a portfolios return
As we are in a low interest rate environment at the moment it can be quite lucrative to understand and utilise the benefit of franked dividends, particularly within the superannuation environment.
How does it work?
Listed companies that have paid tax at the company tax rate of 30% and have passed on tax-paid dividends to their shareholders carry what is called imputation credits. This means that the shareholder receiving those dividends are entitled to receive credit on the tax that has been paid and pay only the difference between that and their own tax rate. In the case where the shareholder is a super account in pension phase (zero tax environment) that super account is entitled to be credited the whole 30% that has been paid by the share/company it is invested in.
Grace’s super account (in pension/retirement phase) is a shareholder in XYZ company pty ltd owning $100,000 worth of shares which pay a 7% franked dividend of $7,000 and is therefore entitled to $3,000 in franking credits. As the fund is in a zero tax environment the fund effectively receives a bonus of $3,000 and therefore increases the dividend return to 10%.
Grace’s super account (in accumulation phase) is a shareholder in XYZ company pty ltd owning $100,000 worth of shares which pay a 7% franked dividends of $7,000 and is therefore entitled to $3,000 in franking credits. As the fund is in a 15% tax environment the fund effectively receives a bonus of $1,500 and therefore increases the dividend return to 8.5%.
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