Do You Invest For Income? What You Need To Know.

By Janine Cox

Investors who invest for income, get angry when governments tinker with policy which impacts thier investment returns as many, including retirees, rely on income they receive from dividends and franking credits. The proposed change to the company tax rate is one that will see many investors left out of pocket. However, there is something you can do about it.

Firstly, if you are an investor holding shares as you invest for income because you need to rely on those regular payments, then you consider dividend payments to be very important and as such you want good solid companies paying good dividend yields in your portfolio. When your intention is to invest for income, then those companies should pay healthy dividends around the market average or better and are at least partially, but preferably fully franked.

A fully franked dividend means that the company paying the dividend to shareholders has already paid tax on the income earned. The benefit to investors who invest for income is that you can use the franking, or tax already paid to claim a rebate come tax time. Since 2000 the benefits have become very attractive for people on low incomes and particularly retirees, as prior to the change in the legislation, if your income was below the threshold you lost the franking.

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To find out how much income you can receive in dividends and the franking attached to them on any company you can search the Australian Securities Exchange (ASX) website. Alternatively, you can use online brokers for the information if you have one. Currently, the average dividend is around 4.7 per cent, with the banks and other big stocks like Wesfarmers and Woolworths, along with some of the big industrial companies, paying fully franked dividends at around or above this average.

Under the Federal government’s proposed changes, the company tax rate will be cut by 1.5 per cent, and many may not have realised that the implications of this change would be to reduce their rebate or net benefit from the franking. If you are a smart investor you may have logically seen the tax cut as an opportunity for companies to pay out higher dividends so as to offset the effect on shareholders, however, as the tax cut is being offset by a levy to cover the parental leave scheme this is not the case, and investors who invest for income will be worse off with the implementation of the tax.

Whilst you may be in favour of the parental leave scheme, and perhaps for you the change to the company tax rate may have a very small net impact on your bottom line come tax time, for low income earners relying on the franking to supplement their income it will come as a real blow.

The positive in all of this is that you can do something to improve the overall position of your portfolio by reviewing the current dividend payout and franking for each of your holdings. Consider selling stocks that pay dividends well below the average that are not fully franked and look to buy stocks in the top 50 biggest companies with dividends around the average that have the full level of franking.

Janine Cox

Senior Analyst

Wealth Within