Retirees may find they are missing out on extra income as their Australian equity portfolios fail to take full advantage of the franking credit system.
Plato Investment Management portfolio manager, Dr Peter Gardner, said more income could be generated from franking credits alone rather than cash investments such as term deposits. This was particularly important when interest rates were record lows of 0.1%.
“Many pension phase and tax-exempt investors we speak to remain surprised that one dollar of pre-tax income from fully franked dividends is actually worth $1.43 to them after receiving the franking refund. This is despite the significant attention franking received at the last Federal election,” Gardner said.
“Fortunately, dividend income remains relatively strong and franking credits remain in place.”
Gardner said, of the various equity sectors, the mining sector had the largest franking yield returns thanks to companies such as BHP, Rio Tinto and Fortescue Metals.
“Fortescue Metals is currently paying a gross income of 14.5%, including a franking yield of 4.3%. We expect this to be sustainable in the foreseeable future and believe there remains a positive outlook for the price of iron ore. Rio Tinto and BHP are other notable dividend payers at the moment which offer retirees the additional benefit of fully franked dividends,” he said.
“A focus on investing in companies that offer franked dividends in a no-brainer for retirees, but unfortunately we find many aren’t doing this, the same goes for tax effective buybacks which can also add considerable after-tax alpha when on offer.
“Retirees should assess the management of their equity portfolios to ensure they have a bias towards franked dividends and take advantage of other tax-effective opportunities such as buybacks.”
