Franking Credits

Hi all,

I'm just starting to look at buying some shares.

Is there a formula that I can use to work out the effect that franking has on the overall yield?

E.g If I wanted to buy NAB shares, the current dividend yield is 5.6% and the share is 100% franked. What forumula do I need to use to work out the impact of the franking on the yield?

Would appreciate any help with this.

Regards Jason.
 
Hi all,

I'm just starting to look at buying some shares.

Is there a formula that I can use to work out the effect that franking has on the overall yield?

E.g If I wanted to buy NAB shares, the current dividend yield is 5.6% and the share is 100% franked. What forumula do I need to use to work out the impact of the franking on the yield?

Would appreciate any help with this.

Regards Jason.

100% franking, gross yld is (net yld)/0.7
Franking yld: gross yld - net yld
 
To work out the effect of the franking credit you would also need to know what your marginal incremental tax rate is...in other words the tax rate that will apply for every extra $ of income you earn.

You would use the tables on the ATO web-site:-

Resident Tax rates 2009-2010

Taxable income earned Anywhere
Tax rate
%

$6,001 - $35,000
15c for each $1 over $6,000

$35,001 - $80,000
$4,350 plus 30c for each $1 over $35,000

$80,001 - $180,000
$17,850 plus 38c for each $1 over $80,000

Over $180,000
$55,850 plus 45c for each $1 over $180,000

If you are an Australian resident for tax purposes and your taxable income (when the dividend and franking credit are included...i.e. the groseed up dividend) does not exceed $6000 you will receive a refund for the full value of teh frankign credit.

If your taxable income (when the dividend and franking credit is included)) is between $35001 and $80,000 you pay no tax on the dividend (assuming the dividend is fully franked at 30%)
 
Hi Jingo,

Assuming you earn under $80k per annum and are therefore in the 30% tax bracket, then the following example may help:

Assume $100,000 invested

Dividend at 5.6% - $5,600
Add Imp Credit - $2,400 ($5,600 x 3/7)
Assessable Income - $8,000

Tax at 31.5% - $2,520 (don't forget the 1.5% Medicare levy)
Less Imp Credit - $2,400
Net Tax to pay - $ 120

So you therefore earn an after-tax return of 5.48%.

Therefore investing in fully-franked shares works well if you are in the 30% tax-bracket, really well if invested in a superfund (as superfunds only pay 15% tax) but reduced effectiveness if you are over the 30% tax-bracket.

Zargor

Disclaimer

Don't take my word for it - check everything I say.
 
Buzz,

Depends how far ahead of time you mean. You can't know beyond the next declared dividend, if there currently is one. The franked amount can vary from dividend to dividend.

GP
 
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