First Fund Dividends and Sustainability

If you’re been around since the very beginning, way, way back at the start of 2018, you might be familiar with my investment F’hilosophy by now:

  1. I’m a big Fan of Index Funds – so yes, I respect Indexing Ian for what he does, even though there will be no index investments in the Fully Franked Fund;
  2. I don’t think the market is fully eFFicient, and as a result it’s possible to find great individual stock opportunities where price and value diverge (although this is no easy task); and
  3. Fully-Franked dividends are a Fantastic Foundation.

A core part of my investment strategy is the Focus on Fully Franked dividends – as well as the Fantastic tax benefits they provide (of course, this might be impacted slightly if the Government is successful with its $59 billion tax grab on Franking cash refunds).

I’m just about to pull the trigger on Fund Investment #7, but before I do, let’s look at the Fully Franked dividend potential of the Fund so far…

Upcoming March Dividends

Most Australian shares pay dividends only twice a year – around March / April, and again in September / October.

Of our 6 Investments so far, 5 of them will catch the March / April round of dividends. Woodside Petroleum will have to wait a few months for its maiden dividend contribution to the Fund.

Let’s have a look at what is coming our way in March…

$59 Billion Government Tax Grab? Get your Franking Dirty Hands off my Franking Credits!

Australia’s dividend imputation system, the source of those Fantastic Franking Credits, is a beautiful thing for share investors. In July 1987, Australia introduced this system as a way to reduce the ‘double taxation’ on dividends that happens under a classical tax system – tax on the company profits, then more tax paid by the individual on the dividends they receive.

Plenty of other countries around the world were adopting something similar at the time, but many have since moved to other approaches to eliminating this double-taxation issue.

We’ve had debates over the years on whether this system is still ideal, however the imputation system works very well at ensuring that the total tax paid on any (Franked) dividends reflects the marginal tax rate of the investor. Here’s a refresher on how it works (if you haven’t already seen the Franking Credit page):

 

And here’s the various tax brackets for individuals in Australia, and the impact of the Franking Credits on dividends which come from the imputation system:

Things have been ticking along pretty nicely for genuine dividend focused investors.

However, over the past couple of days, the Australian Government has announced a proposal to ‘tweak’ the imputation system. They will also just happen to benefit to the tune of around $59 billion! (so say all the emotionally charged headlines on the issue – thought I’d keep up with this strategy for my own post title…)…