Winning With Australian Share Dividends
Posted on 13. Jun, 2010 by Global in Uncategorized
Income stocks are often viewed as boring and stodgy. But if you want to outperform the market, you could do far worse than investing in dividend paying shares that distribute a steady and growing stream of fully franked dividends. Maybe it’s that the growth stories get the front page – not the stodgy dividend payers. But what’s lost in the news is that dividends are a sign of financial strength, of a real business making real profits.
Consider the Total Stockholder Return
When assessing the performance of stocks, inexperienced investors risk falling into the trap of looking purely at short term stock price movements, in the process ignoring the value of dividends which may be paid.
The dividend shares figure should also take account of any special one-off dividend payments, as well as regular dividend payouts. As well, in Australia we should include franking credits.
While it is possible that a stock could deliver a negative price performance over a certain period yet still generate a positive total shareholder return should the dividend paid outweigh the stock price fall, in practice this happens only rarely.
More Dividend Cream with Franking Credits
Australian share investors have something to smile about despite the market volatility, its because of the way they receive their dividends. Depending on the shareholder’s personal tax position, they will be paid the dividends on their shares with the tax fully paid already — there’s no further tax to pay on them. In some cases their dividends will give them a tax credit and possibly even a tax refund.
The investor should think of the franking credit as income. The investor doesn’t get it in cash, only as a kind of IOU from the tax office, but nonetheless it and the cash portion make up pre-tax income. Therefore a fully franked dividend of $0.70 plus $0.30 credit is equal to an unfranked dividend of $1.00, or to interest of $1.00, or any other ordinary income of that amount. (It’s exactly equivalent because franking is fully refundable, as described above.)
The effect dividend imputation has on individual shareholders depends mainly on two things – your own taxable income, and how much tax the company paid, (or, equivalently, what franked dividends it received itself) before it distributed a dividend. In some cases, a shareholder can actually pay less tax after receiving income than would have been payable without it.
Consider the Dividend Story when Selecting Shares
Target reliable dividends that grow steadily over time. Yields greater that 10% may indicate the stock is in trouble and the dividends may soon dry up completely.
Finance theorists use forecast dividends to value shares. One method is to take the current dividend and divide it by the risk free rate less the forecast dividend growth rate. The greater the growth rate the greater the share valuation.Dividend forecasts are what many investors use to assess prospective share investments.
The health of a company can be measured by its ability to generate earnings and growing dividend streams. If dividends are historically reliable and expected to grow consistently, then the share price appreciation will look after itself.
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