Are dividends real income?

[waimate01]

Am I missing something?

No, you're not missing anything. A $10 unfranked div and a $7 franked div are equivalent.

But that said, I prefer franked dividends because it means the business is paying tax, which means it's probably not just reporting imaginary profits and paying dividends out of borrowings or capital expansion. It's a useful 'sniff test'.

(But there are plenty of business that have a good reason for not paying fully franked dividends - notably those with offshore earnings. So some interpretation required).

 

[Craton]

@qldfrog: Franked/unfranked whatever, its certainly something I look at as an investment decision but no doubt we all have differing strategies so each to their own

 

[Bill M]

I have to say I do not understand what all the fuss is about Franking?

[*]case one you pay extra 20% tax on the dividend 2%-> net return 1.6% after tax
[*]case two, you pay 50% tax on 3.2% return-> net return 1.6% after tax

->1.6 % tax free return

Am I missing something?

No, with that example you are right.

To simplify things for a newbie investor: If 2 stocks of similar type and business are paying dividends and

1. Is offering 5% unfranked

and

2. The other is offering 5% franked

Then I would go the franked one everytime.

For the newbie, you need to gross up the dividend.

Case at hand, I am considering buying VHY (Vanguard High Yield ETF). Right now this ETF is paying a 4.8% partly franked dividend. When you tally up the dividend + franking it comes to around 6%. 6% for doing nothing but investing in an ETF with no trading or monitoring involed is not bad money at all in this low interest rate environment.

And the point I was trying to make earlier is that with a Super Fund in pension mode you will not have to pay tax on the 6% either.

 

[qldfrog]

No, you're not missing anything. A $10 unfranked div and a $7 franked div are equivalent.

But that said, I prefer franked dividends because it means the business is paying tax, which means it's probably not just reporting imaginary profits and paying dividends out of borrowings or capital expansion. It's a useful 'sniff test'.

(But there are plenty of business that have a good reason for not paying fully franked dividends - notably those with offshore earnings. So some interpretation required).

Good point I had not considered before..well aware of the O/S effect but the ability to offer franking means some actual ATO profit
Good point indeed

 

[mistersmith14]

Literally, yes apart from your earnings.

 

[Value Collector]

Since a share's price is adjusted downward by the amount of the dividend, how can a dividend be called income? Isn't it the same as having a bank account where they pay you 3% but take 3% out of your account beforehand? Or am I missing something here? Just wondering...

Yes, offcourse dividends are real income,

Using your example, its like having a bank account that pay 3% interest, So it goes from $1000 to $1030 over the space of the year. At the end of the year they pay out the $30 so the account goes back to $1000 that you started with.

A company that generates cash flow, will be building up cash reserves through out the year, So technically by the end of the year it is worth more, because it still owns the same businesses it did at the start of the year, But now it has a pile of cash as well in the bank from the earnings, So the value of the share should have gone up to reflect that extra cash sitting as an asset.

If that extra cash gets paid out to shareholders, the value of the stock should go down by that amount,

So yes it is real earnings, the drop in value after dividends is paid out is offset by the gradual accumulation of value as those earning were built up.

Notice I said value though and not market price, Because market may not always follow the value exactly.

 

[dave39]

To be a qualified dividend, the investor must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

not true. the rule is 45 days plus buy and sell day so in reality it is 47 days. to get the franking credits you must hold the share 47 days (reset preference shares it is 90 days +2). The share must be held at risk for those 47 days so you can't use any insurance methods - put options etc to cover a down turn. If your total franking credits for the year from all share dividends is less than a figure of around $3000 (I can't remember the exact figure without going to the ATO website) then you can collect the franking credits even if you didn't hold the shares for 47 days. You could buy the shares 1 day before ex-date and sell them 47 days later, some people do that. You could do the ASX website dividend stripping game of buying immediately after the company announces its financial statement and if the results are OK buy then or you could take a punt and buy ~40 days before the expected ex-date and hold for a few days after the ex-date to see how the price recovers and then sell. there is no such 60 day/121 day rule - never heard of it.

Dave

 

[mattsharp]

Since a share's price is adjusted downward by the amount of the dividend, how can a dividend be called income? Isn't it the same as having a bank account where they pay you 3% but take 3% out of your account beforehand? Or am I missing something here? Just wondering...

It it transferring some of the value in the company to the shareholder. That value has been building up on the business' balance sheet as cash since the last dividend, then come dividend time it is removed from the company's balance sheet and added to yours. If you buy shares some time after a dividend, part of the price you pay is for the cash that has accumulated since the last dividend.

 

[waimate01]

It it transferring some of the value in the company to the shareholder. That value has been building up on the business' balance sheet as cash since the last dividend, then come dividend time it is removed from the company's balance sheet and added to yours. If you buy shares some time after a dividend, part of the price you pay is for the cash that has accumulated since the last dividend.

+1

Mrs Waimate01 had been troubling over this effect, thinking there was some sort of catch. She grew up on the land, and I found a good explanation that made sense to her was to think in terms of selling a mare (female horse). The mare might be worth $1000, but a mare that's just about to foal might be worth $1200. The day after it foals, it'll be back to worth $1000. Arguably if the mare was only 170 days into its 340 day gestation, it might be worth $1100. (*)

(* I didn't grow up on the land, so have no idea whether these relative figures are indicative or not. But the principle is the same. Now I need to sit down and try to work franking credits into the analogy somehow).

 

[GwenRowen]

The stock market is one of the best ways to build wealth, but not all stocks are created equal. Whether your long-term investment horizon is five years, 25 years, or 45 years or more, your best option for creating long-term wealth is with a diversified portfolio of high-quality income stocks. Learning how to invest in dividend stocks, however, is a lot more work than picking the names with the highest yield.

Before the financial crisis, investors were told it was financially prudent to invest a portion of their retirement portfolio into fixed income investments like Treasuries or Certificates of Deposit (CDs). And why not? Fixed income returns provided investors with stable income; they know what their annual returns will be and can budget accordingly.

 

[minwa]

The stock market is one of the best ways to build wealth, but not all stocks are created equal. Whether your long-term investment horizon is five years, 25 years, or 45 years or more, your best option for creating long-term wealth is with a diversified portfolio of high-quality income stocks. Learning how to invest in dividend stocks, however, is a lot more work than picking the names with the highest yield.

Before the financial crisis, investors were told it was financially prudent to invest a portion of their retirement portfolio into fixed income investments like Treasuries or Certificates of Deposit (CDs). And why not? Fixed income returns provided investors with stable income; they know what their annual returns will be and can budget accordingly.

And click here to read the rest because the copy paste was incomplete: https://www.incomeinvestors.com/invest-dividend-stocks/4765/