Dividend Imputation

Australia has a full dividend imputation system which gives investors an incentive to invest in Australian companies.

The nice Australian tax office prevents people being taxed again on dividends that the company has already paid tax on, preventing double taxation. We are lucky, the US does not have dividend imputation and the UK has a partial system.

What this means is that 30% tax has already been paid by the company issuing the dividend so you get to claim this back.

Example

Woodside Petroleum

100% franked

Current price: $32

Dividend: $2.74 per share

Yield: 8.55%

Franking credit: $1.17 per share

Grossed up dividend (after franking credit) 8.55/70 * 100 = 12.2%

The dividend imputation system effectively gives you a 43% boost to fully franked dividend payments.

You receive payment of $2.74 as a dividend, then at the end of the tax year you get the $1.17 franking credit either offset against your tax or if you don't pay enough tax then a tax refund. This is why I love franking credits, they are refundable, they are available to everyone, no matter how much tax they pay.

How much of a leg up does this give Aussie investors?

If you only invested in companies that pay fully franked dividends paying an average dividend of 4%, then after taking franking credits into account you would actually get a yield of 5.72%

Franking credits can only be claimed by Australian residents, so foreign investors don't get this advantage.

Not all companies pay fully franked dividends, in fact only about 330 out of 2000 companies on the All Ords actually pay fully franked dividends.

Companies paying fully franked dividends:

A list of top rated dividend paying stocks can be found on dividends.com.au