Why you should buy dividend paying stocks

We have talked about passive income before and receiving dividends from your stocks and ETFs is a great way to generate some on a regular frequency. They are also a useful tool in building your stock portfolio as you can use the funds to purchase more shares.

Before making a purchase on some new units of stock, it’s good to look into what the dividend history and yield is.

What are franking dividends?

Franked dividends are when the after-tax profits of a company are distributed to shareholders as dividends. A franking credit, or also known as imputation credits, defines the amount of tax the company has paid.

If you choose to reinvest the dividend payment to purchase more shares, it’s still required to be mentioned on your tax return. It’s a good idea to print your statements out or keep them in an online cloud storage service like Dropbox so you have everything accounted for come tax time.

dividend-paying-stocks-income-master-1

What is the difference between franked and unfranked dividends?

Unfranked dividends will sometimes mean that you will have to pay more in tax than receiving fully franked dividends but the results will vary depending on which income bracket that you fall into.

So for example, if you fall into the $37k to $87k taxable income bracket and you received $700 in dividend payments,  paid fully franked with an imputation credit (or franking credit) of $300, this is how the calculation would look:

34% tax bracket (32.5% marginal tax rate + 1.5% Medicare levy).

$1,000 x 34% = $340 tax payable less the $300 in imputation credits already paid.

So $700 – $40 = $660 after tax.

Australian income tax rates

Resident tax rates 2017–18 (Source ato.gov.au)
Taxable incomeTax on this income
0 – $18,200Nil
$18,201 – $37,00019c for each $1 over $18,200
$37,001 – $87,000$3,572 plus 32.5c for each $1 over $37,000
$87,001 – $180,000$19,822 plus 37c for each $1 over $87,000
$180,001 and over$54,232 plus 45c for each $1 over $180,000



What are good Australian dividend paying stocks?

Here are some examples of good dividend paying stocks that you can buy from the ASX (Australian Stock Exchange).

  • Commonwealth Bank Of Australia [CBA]
    Annual Dividend yield 5.44%
    100% Franked
    EPS 5.776 AUD
  • Westpac Banking [WBC]
    Annual Dividend yield 6.15%
    100% Franked
    EPS 2.380 AUD
  • Australia and New Zealand Banking [ANZ]
    Annual Dividend yield 5.65%
    100% Franked
    EPS 2.201 AUD
  • National Australia Bank [NAB]
    Annual Dividend yield 6.83%
    100% Franked
    EPS $1.947 AUD
  • Telstra [TLS]
    Annual Dividend yield 8.68%
    100% Franked
    EPS $0.325 AUD
  • Cardinale Property Trust [CDP]
    Annual Dividend yield 5.21%
    EPS 0.633 AUD
  • Nick Scali Limited [NCK]
    Annual Dividend yield 4.78%
    EPS 0.460
    100% Franked

Banks, in general, all pay strongly so they are good to have in your investment portfolio. When making the decision to purchase stock, it pays to look at the dividend payout history. Some companies may struggle to build a nice, consistent payment growth and suffer pay cuts on weaker years.

 

One Reply to “Why you should buy dividend paying stocks”

  1. Couldn’t agree more with the benefits of Fully-Franked dividends! It’s a fantastic advantage we have here in Australia, particularly if you have access to a low or no tax account.

    Banks have always had strong history of dividend payments, my only concern is how sustainable they will be at this point in time, and where the growth will come from.

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