Dividend Yield

[steveadl]

Hi all, quick question about dividends on shares.

I understand how franking credits work, but from time to time I see mention of terms like gross dividend or after tax etc such as in this article:

The most obvious option is for the Telstra board to declare a higher dividend. Telstra's dividend yield is currently about 8 per cent or 12 per cent after being grossed up for tax paid.

I understand since the TLS dividend is 100% franked, you have a tax credit on each dollar of dividend of 30c. Just don't quite understand how that turns an 8% yield (ie. .28c/$3.37) into a 12% gross yield? Even if you assume an individual rate of 0 and he gets a full refund on the tax paid by the company, doesn't it look something like this; $1,000 investment (@ $3.37 share price) = 296 shares x .28c dividend = $82.88 + $24.86 tax return = $107.74 on $1,000 investment = 10.7% gross return.

Obviously I'm not following somewhere along the track.

 

[Dazz]

Hi Steve,


Because the Australian company tax rate is currently 30%, the companies giving you a fully franked dividend, work it this way :


Profit to be distributed $ 100.

Tax paid to ATO on your behalf $ 30.

Fully franked dividend paid to shareholder $ 70.


In this example, your 7% nett yield is really 10% fully grossed up.


If TLS paid 8% nett yield, it is really (8 * (10/7) = 11.42% fully grossed up.

If they are saying 12%, then it's a bit of an optimistic rounding error, although carefully reading the wording it says "about 8%".


So it could be 8.2 * (10/7) = 11.7

 

[steveadl]

Sweet, thanks Daz.

Was also me simplifying saying 8%, when the article was written it was probably around an 8.4% yield which takes it to 12% on the dot.

 

[GreatPig]

In a nutshell, for a fully franked dividend, divide the net dividend by 0.7 to get the gross dividend.

Which is exactly the same as multiplying by 10/7, but if you're going to use a calculator anyway, it's quicker to just divide by 0.7.

Cheers,
GP

 

[Aaron Sice]

well, that answered that....lock it!

 

[steveadl]

Not so fast BC!

OK perhaps another stupid follow up question, but I don't think my brain is quite up to scratch today.

Can someone give me the quick calculation where it's not a straight forward fully franked dividend. For example QBE that is only franked 20%.

I assume that means their end result is they've paid tax equivilant to 20% of the 30% corporate rate ie. 100% fully franked is 30% tax paid, 20% is only equivilant of 6% tax paid on the dividends? Or am I way off?

 

[alexlee]

Not so fast BC!

OK perhaps another stupid follow up question, but I don't think my brain is quite up to scratch today.

Can someone give me the quick calculation where it's not a straight forward fully franked dividend. For example QBE that is only franked 20%.

I assume that means their end result is they've paid tax equivilant to 20% of the 30% corporate rate ie. 100% fully franked is 30% tax paid, 20% is only equivilant of 6% tax paid on the dividends? Or am I way off?

That's 20% franked. In practice, that means 20% of the dividend is fully franked. So:

Div per share 66 cents (most recent). Number of shares 1,000.

Unfranked = 80% x 66c x 1000 = $528
Franked = 20% x 66c x 1000 = $132
Franking credits = $132 x 30/70 = $56.57

 

[Dazz]

Hi Steve,


If it's 100% fully franked, divide the franked amount by 0.7 to gross it up.

If it's 90% fully franked, divide the franked amount by 0.73 to gross it up.

If it's 80% fully franked, divide the franked amount by 0.76 to gross it up.

If it's 70% fully franked, divide the franked amount by 0.79 to gross it up.

If it's 60% fully franked, divide the franked amount by 0.82 to gross it up.

If it's 50% fully franked, divide the franked amount by 0.85 to gross it up.

If it's 40% fully franked, divide the franked amount by 0.88 to gross it up.

If it's 30% fully franked, divide the franked amount by 0.91 to gross it up.

If it's 20% fully franked, divide the franked amount by 0.94 to gross it up.

If it's 10% fully franked, divide the franked amount by 0.97 to gross it up.

If it's 0% fully franked, divide the franked amount by 1.00 to gross it up.

 

[alexlee]

Dazz, I don't understand the calc. How would it work in the QBE example above?

 

[Dazz]

Running off the provided QBE numbers - don't know if they are real or not, but anyway ;


66c which is apparently at 20% franking, the grossed up amount would be ;

66 / 0.94 = 70.21 cps


So Steve gets 66c in the hand, QBE pays 4.21c to the ATO on his behalf.


Stevo puts 70.21cps down in the credits on his tax return and takes 4.21cps off his tax bill at the end of his return.


Hell - lucky I'm not an accountant. But you are aren't you ??


I assume that is what Steve was asking, otherwise I'll crawl back under my rock.

 

[alexlee]

By my calculation, it's 71.657per share on the tax return, , with 5.657c in tax credits.

I'm working off an actual QBE dividend statement. Just wanted to know where you were getting those 'divided by' numbers from?

 

[Sunfish]

Hi all, quick question about dividends on shares.

I understand how franking credits work, but from time to time I see mention of terms like gross dividend or after tax etc such as in this article:

I didn't see gross dividend or after tax mentioned in the article. They did speak of EARNINGS after tax though as there are many ways to count that.

If they speak of earnings with no qualifications then that is the reported bottom line. This doesn't mean a whole lot to an investor because it is history and may have been achieved after the sale of a valuable asset which will BOOST one year and will probably be a negative in following years. So an investor will look for earnings before abnormals to judge how an enterprise is trading. Likewise with depreciation, they like that taken out. Eventually it becomes Earnings before interest, tax, depreciation and abnormals. EBITDA (Pronounced on the biz channel as ebit-da')

Not sure if that was what you were asking but now you know anyway.

 

[steveadl]

Thanks for the help guys.

I didn't see gross dividend or after tax mentioned in the article. They did speak of EARNINGS after tax though as there are many ways to count that.

I was referring to this paragraph from the article Sunfish:

The most obvious option is for the Telstra board to declare a higher dividend. Telstra's dividend yield is currently about 8 per cent or 12 per cent after being grossed up for tax paid.

 

[Sunfish]

Telstra's dividend yield is currently about 8 per cent or 12 per cent after being grossed up for tax paid.

Would have been plainer to say: "Telstra's dividend yield is currently about 8 per cent or 12 per cent including franking credits" wouldn't it.