• Many ASX top dividend payers don’t offer fully franked dividends
  • What’s the difference between franked and unfranked dividends?
  • And which is better? 

 

It’s that time of the year again when companies dole out dividends to loyal investors.

This period often reignites debate between franked and unfranked dividends, a topic that has been under discussion since Australia introduced its imputation credit system over 40 years ago.

Franked dividends are essentially dividends paid by a company that has already paid tax on its profits.

So when that company distributes a payout, the investor receives that dividend along with what’s called a franking credit, which can be used to offset the tax payable on the investor’s dividend income.

The difference between a fully franked dividend and a partly franked dividend depends on the amount of tax the company has paid on its profits.

A fully (or 100%) franked dividend includes a franking credit that covers the entire dividend amount, indicating that the company has fully paid tax on the earnings from which the dividend is drawn.

In contrast, a partly franked dividend reflects only a portion of the tax paid. For instance, if a company has paid tax on only 50% of its profits, then the dividend distributed will be partly franked.

When filing their tax returns, investors report both the franking credits and the dividend payments to prevent being taxed twice on the same income.

This system ensures that dividends are taxed fairly, similar to other investment income like interest from term deposits, which is taxed only once.

The benefits of franking credits are clear, and as a result, some investors deliberately choose to buy shares that offer 100% franked dividends to reduce their tax burden.

Another benefit of receiving fully franked dividends is that if an investor’s tax rate is lower than the 30% company tax rate, any excess franking credits might lead to a tax refund.

 

Should you only go for fully-franked dividend stocks?

Many of the top dividend-yielding companies on the ASX are international firms based outside Australia and its offshore territories.

Since these companies primarily operate overseas and generate a significant portion of their revenue from international sources that are not subject to Australian tax, they generally do not provide fully franked dividends.

Newmont (ASX:NEM), Santos (ASX:STO), Contact Energy (ASX:CEN), and Treasury Wine Estates (ASX:TWE) fall into this category.

A peculiar one is ANZ Bank (ASX:ANZ).

Despite the expectation that the big four banks would provide fully franked dividends, ANZ’s most recent payout on July 1st included only 65% franking.

The bank attributed this to its extensive international operations, particularly in New Zealand, and its recent acquisition of Suncorp Bank, which has affected its franking credits.

While the absence of franking credits might initially make these companies seem less attractive, it’s essential to consider their overall potential.

Focusing solely on Australian companies for franked dividends can be profitable, but might limit your diversification options.

Many of these international firms can offer significant long-term growth potential, and diversifying your portfolio with these companies could actually enhance returns.

“Before you discount them, we recommend researching your options to determine whether the potential long-term gains are likely to outweigh the tax obligations that come with unfranked dividends,” said a note from Flagship Investments.

 

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