Imputation Credit strategies SMSF

[awg]

I am curious as to whether any other SMSF investors, especially in Pension phase, have an investment bias toward highly franked stocks.

I will outline my thinking, and invite opinions, disagreement especially welcome.

It seems to me that there is two main areas where an edge can be obtained.

1) In the instance of low tax rate, and I will use the example of 0% for Super Pensions, the imputation Credits are fully refunded. This obviously gives a higher rate of return than investors who pay higher rates of tax.

( Advantage also for 15% accumulation phase super)

2) Narrows the Universe of Stock selection/research..this means better research

I dont focus on high Dividend payment as such, in fact I prefer if the Co, reinvests at a high ROR...the edge comes soley from the Imputation Credit refund percentage.

I prefer to follow a core/satellite strategy for my SMSF, as it simplifies the process and reduces time demands.

I do not exclude capital gains by any means, as they are also non-taxed, and a gain is a gain.

I do spend time looking for speccy stocks for big gains, but feel this excursion has been taking up too much time, and has obvious higher risk.

So I am considering reverting slightly more to my previous strategy.

So to summarise, a higher percentage of stocks that pay FF divs, high ROE, consistent ROR over time

 

[Julia]

Tony, I think it largely depends on how much time and interest you have.

I never put dividends above projected capital gain. If, e.g. you have a stock that's increased 72% in three months, there's no way even a healthy dividend plus the franking credit is going to come anywhere near that.

I know a lot of people place a high importance on receiving the dividend income stream. I rather take the view that it's your overall bottom line increase that matters, and if this is more available via a capital gain, then that's what I will be looking for.

I've heard some mutterings that the imputation system might be up for change via the Henry review. Hope that's wrong.

 

[Prospector]

I've heard some mutterings that the imputation system might be up for change via the Henry review. Hope that's wrong.

I have heard that too - so much so that this financial year we are paying ourselves dividends from accumulated profits over the last few years in our own business, rather than as salary. The accountant always tells us we are loaning the tax office too much money by not using them up. But then if they disallowed the IC system altogether -

I have a mix (not in pension phase though) and in recent times am enjoying the tax offset of IC. But as Julia said, growth is also important to consider. But with that, comes risk too I guess.

 

[Krusty the Klown]

I have heard that too - so much so that this financial year we are paying ourselves dividends from accumulated profits over the last few years in our own business, rather than as salary. The accountant always tells us we are loaning the tax office too much money by not using them up. But then if they disallowed the IC system altogether -

I have a mix (not in pension phase though) and in recent times am enjoying the tax offset of IC. But as Julia said, growth is also important to consider. But with that, comes risk too I guess.

Bear in mind that the Henry Review is just that, a review. Any changes to the system would have to be legislated, so you would have plenty of time to use up any accumulated franking credits.

Personally, I think any government that got rid of franking credits would only do so if they really, really, really wanted to be voted out of office, particularly when the dividend imputation system has been an outstanding success.

 

[Prospector]

Bear in mind that the Henry Review is just that, a review. Any changes to the system would have to be legislated, so you would have plenty of time to use up any accumulated franking credits..

Maybe, but teflon man seems bulletproof at the moment. And often these things are brought in on a particular date - may be too late. And we do have quite a few years worth of them....:

 

[awg]

Tony, I think it largely depends on how much time and interest you have.

I never put dividends above projected capital gain. If, e.g. you have a stock that's increased 72% in three months, there's no way even a healthy dividend plus the franking credit is going to come anywhere near that.

I know a lot of people place a high importance on receiving the dividend income stream. I rather take the view that it's your overall bottom line increase that matters, and if this is more available via a capital gain, then that's what I will be looking for.

I've heard some mutterings that the imputation system might be up for change via the Henry review. Hope that's wrong.

Henry could be a fly in the ointment, means I would no longer have to consider franking strategies

I do want to hone in on one point, that is:

its the franking credits themselves I am considering, not the divs per se, although you cant get one without the other.

Agree that total return is over-riding consideration, but in the hypothetical instance of the stocks having equal growth, or overall average ROI, it is the after-tax situation I am considering.

Wondering if low tax investors gain an edge by biasing toward highly franked stocks ( all other things being equal ), and if anyone else has followed this approach. If not, why not?

My accountant who is very experienced, has fully endorsed this approach.

Nick Radge's detailed article gave additional credence IMO

Endeavoring to gain a marginal increase in risk/return

Julia, have you checked the stocks in yr portfolio..most of the ones I can recall you have mentioned would pay high % franking credits, I think?

 

[Julia]

Wondering if low tax investors gain an edge by biasing toward highly franked stocks ( all other things being equal ), and if anyone else has followed this approach. If not, why not?

OK, let's take an example to demonstrate my point. I happened to receive a dividend from WOR today. It is $1100 and carries a franking credit of $471.
I have held this stock for a bit less than five months and have a gain of about $19,000. What is more important, the capital gain (especially when paying no tax) or the piddling dividend and franking credit?

OKN, to which I referred earlier, which I've held for three months is giving a 76% return on capital investment. Its dividend is a mere 0.8%, 100 franked.
Do I care about the miserable dividend? Of course not.

My accountant who is very experienced, has fully endorsed this approach.

Accountants, in my experience, are very good about telling you how to minimise your tax but pretty often not too smart about helping you actually make money. If tax is your main consideration, I take your point, but even then you'd have to be paying the top tax rate and a lot of it to be focusing on franking credits rather than capital gain imo.

Julia, have you checked the stocks in yr portfolio..most of the ones I can recall you have mentioned would pay high % franking credits, I think?

Yes they mostly do, but that was absolutely not why I bought them.

 

[Amor_Fati]

To the OP:

what is the difference between a 10% unfranked div and the equivalent 7% fully franked div with a 3% franking credit? At 0%, 30% or 46.5% tax rate?

Of course the 7% fully franked is better than a 7% unfranked, but so is 10% unfranked.

 

[Prospector]

happened to receive a dividend from WOR today. It is $1100 and carries a franking credit of $471. I have held this stock for a bit less than five months and have a gain of about $19,000..

: Nice job for 5 months hold Ms J!

 

[Julia]

awg, any more comment from you on these respective strategies?

 

[awg]

awg, any more comment from you on these respective strategies?

happy to continue to explore the ideas

I have attached links to the original post that got me re-interested in this line of thinking (and especially linked article by Nick, hopefully this is OK), the article illustrates some points in a more detailed articulate manner, well worth the read.

https://www.aussiestockforums.com/forums/showthread.php?t=16357

https://www.aussiestockforums.com/images/tc/487118.PDF

I totally agree that capital growth should outweigh div + Franking, have plenty of 50% to 100% gains with the ones I bought back near market lows, but in a less bullish market, where total returns might be expected to average more like the historical 12%, then small edges such as fees and Franking credits become more like risk free addition to the bottom line.

Interesting that 4 stocks we have discussed, WOR, WOW MQG and OKN, all make it onto my list of prospectives ( although MQG is only 70% Franked), suggests that there may be some correlation quality....Nicks article expands

In the instance where total return was, say, 20% and franking credit accounted for 1%, that would be a relative outperformance of 5%.

I am hypothetically considering the situation where one matches the market in pre-tax total return, but adds a small % or two using strategies that suit SMSF pension phase, ( or other low rate taxpayers)

This can be tens of thousands in a decent sized account, and compounded over many years can make a huge difference.

I have reduced my management fees from about 1.8% to .07%, and if I can get a another steady 1% or 2% safely, using additional methods, that would be good.

Companies that pay fully franked dividends tend to be blue/green chip

To the OP:

what is the difference between a 10% unfranked div and the equivalent 7% fully franked div with a 3% franking credit? At 0%, 30% or 46.5% tax rate?

Of course the 7% fully franked is better than a 7% unfranked, but so is 10% unfranked.

No difference between 10% UF and 7% FF

Which brings me to the question of how companies decide on the tax position of their distributions?, the property trusts, some of which I hold and have grown well, all pay unfranked distributions

as to part B of yr question, it is the AFTER tax return that is the whole nub of this thread, as it is especially for 0% or 15% payers, hence the focus on Franking level, not dividends by themselves

So total return at 0% = $10
at 30% =$ 7
at 46.5% = $5.35

for dividend payment component.

Dont intend to give up entirely on small caps, VMG, CNX up over 100%, but as I am in SMSF pension phase, risk reduction is also important.

feel free to keep asking questions please

 

[Julia]

I totally agree that capital growth should outweigh div + Franking, have plenty of 50% to 100% gains with the ones I bought back near market lows,

Can you share some of these and when you bought them?

Interesting that 4 stocks we have discussed, WOR, WOW MQG and OKN, all make it onto my list of prospectives

I've always had WOW until I sold everything January 08, had always intended buying it again, but won't be putting too much into it this time. It's a good defensive stock but there may not be that much growth compared to some others. Only 3.7% yield, awg, from your point of view.

I am hypothetically considering the situation where one matches the market in pre-tax total return, but adds a small % or two using strategies that suit SMSF pension phase, ( or other low rate taxpayers)

That's real micro-management. Good for you if you can be bothered.

I have reduced my management fees from about 1.8% to .07%, and if I can get a another steady 1% or 2% safely, using additional methods, that would be good.

What are you including in your 'management fees"?

Companies that pay fully franked dividends tend to be blue/green chip

First time I've ever heard the term 'green chip' companies. Which are these?

the property trusts, some of which I hold and have grown well, all pay unfranked distributions

Did you continue to hold these right through the downturn? Which ones?

 

[Amor_Fati]

No difference between 10% UF and 7% FF

Which brings me to the question of how companies decide on the tax position of their distributions?, the property trusts, some of which I hold and have grown well, all pay unfranked distributions

as to part B of yr question, it is the AFTER tax return that is the whole nub of this thread, as it is especially for 0% or 15% payers, hence the focus on Franking level, not dividends by themselves

So total return at 0% = $10
at 30% =$ 7
at 46.5% = $5.35

I am glad you see that 10%uf and 7%ff are equivalent. Your table works for both. I do not understand why then you are focusing on the franking credits so much? Yes yield is great but does it matter what proportion is cash or franking credits?

With regards to property trusts etc paying unfranked dividends, companies can only distribute franking credits equal to the amount of tax they have paid, that is the point of the whole system. However, they can pay out more than just taxable profits as dividends particularly unrealised capital gains, profits where tax was not paid due to past losses etc.

 

[awg]

Can you share some of these and when you bought them?


I've always had WOW until I sold everything January 08, had always intended buying it again, but won't be putting too much into it this time. It's a good defensive stock but there may not be that much growth compared to some others. Only 3.7% yield, awg, from your point of view.

That's real micro-management. Good for you if you can be bothered.


What are you including in your 'management fees"?



First time I've ever heard the term 'green chip' companies. Which are these?


Did you continue to hold these right through the downturn? Which ones?

The ones up between 50 to 100% since purchased in the last 12 months

ANZ, CNX, CFU, CWE, GXY, LEI, LNG, MCW, PRU, RIO, VMG ,WPL

My management fees include all audit and accounting costs for SMSF, (but not brokerage, however buy/sell spread is not included for Managed Investment trusts in retail funds either).

Lots of talk about "after tax returns"..makes a big difference, you have only got to see the various adverts outlining the big difference made due to fees in super, compounded over time, to see what a outperformance of 1 or 2% can make.

Obviously, if you can outperform the market consistently, with superior stock selection and timing, that is much better, but not many can, and whether I can is the relevant question!

green chips are one step down from blue chips

WOW is the only company that I never sold any units.
This company comes up high on almost any criteria I use, almost impossible to ignore for SMSF. At 3.7% + FF thats about 5% after tax, beats bank interest, but 10 yr avr return and ROE both above 15%

As I have mentioned before, I moved from a retail WRAP to a SMSF.

sold down some units and rebought but continued to hold partial including BHP, CBA, NCM, TLS

gotta go now, a bit more later

 

[condog]

For us dividend stream is vital....

I'm looking to retire self funded by age 41-43, currently 37.8. For me financial freedom is not attained until average passive income is ample to meet average expenses plus some.

2009 was my best year ever. While others where running for cover and panicking, I was grinning from ear to ear for two reasons. Firstly 2008 had been such a great dividend year , with me reinvesting 100% of dividends plus 25% of my and my wife's income into direct shares, that in 2009 I had a record number of shares and despite some reductions in dividends still received my biggest dividend steam ever. Not only that , but with that dividend stream I bought record numbers of shares in 2009.... and as such 2009 became my new record year, with 2010 looking rediculously better again.

They say fortunes are made in years like last year....and if you've set yourself up with a strong stream of fully franked dividends I could not agree more.... You have cash to spend when you need it most for the best buying opportunities....

In contrast if you set yourself up with a priority for growth over income, you must get out of the market and rely on timing to be cashed up.... Thats pretty easy if you only own a few stock, but its ridiculously difficult if you own a well diversified portfoio with 20-30 stock.

So in waying up whether growth or Divs are your priority you must consider whats going to happen to your strategy in good and bad times....Using this philosophy always pushes SFRetirees to a preference for dividends.

In terms of super funds v stock performance. We have 4 funds in Aussie shares. Our direct share investment portfolio outperforms our funds every year by a significant margin.... And in corrections our direct shares massively outperforms our funds.

 

[gooner]

I am curious as to whether any other SMSF investors, especially in Pension phase, have an investment bias toward highly franked stocks.

I will outline my thinking, and invite opinions, disagreement especially welcome.

It seems to me that there is two main areas where an edge can be obtained.

1) In the instance of low tax rate, and I will use the example of 0% for Super Pensions, the imputation Credits are fully refunded. This obviously gives a higher rate of return than investors who pay higher rates of tax.

( Advantage also for 15% accumulation phase super)

2) Narrows the Universe of Stock selection/research..this means better research

I dont focus on high Dividend payment as such, in fact I prefer if the Co, reinvests at a high ROR...the edge comes soley from the Imputation Credit refund percentage.

I prefer to follow a core/satellite strategy for my SMSF, as it simplifies the process and reduces time demands.

I do not exclude capital gains by any means, as they are also non-taxed, and a gain is a gain.

I do spend time looking for speccy stocks for big gains, but feel this excursion has been taking up too much time, and has obvious higher risk.

So I am considering reverting slightly more to my previous strategy.

So to summarise, a higher percentage of stocks that pay FF divs, high ROE, consistent ROR over time

I look at franking credits as just being part of the overall return on an investment. It really does not matter whether returns come from income or capital gains where you are in a zero tax environment.

The main area I consider franking is when looking at companies to invest in - two similar companies, but one has franking due to being mainly Australian based and one does not due to being mainly offshore, I will prefer the one offering franking as this can significantly enhance the return.

And as I do pay tax, I prefer capital gains. And I hate unfranked dividends - what's the point???????