Many investors DIY skew their investment portfolios towards stocks that pay franked dividends. This is especially prevalent among the self-managed by the trustees of pension funds that appear to benefit more than the value of franking credits.
seems to be a franking position that offers a "free lunch", which resulted in its overemphasis as a driver of investment strategies.
We believe that investors should not use individual stocks, because they simply pay franked dividends. conventional thinking behind such behavior is, in our opinion, wrong.
Below we discuss four franking "myths ":
Myth 1: Franking levels indicate a greater proportion of future performance
Most financial analysts believe the company's stock price was driven primarily by market share estimate of its after-tax profit outlook. If they are right, and then choosing one over the other shares of the Company based on current levels of franking alone does not make sense.
Myth 2: Franking advantage of low rates of tax payers'
Some low tax rate of shareholders (eg, self-managed super fund trustees) believe they get better relative advantage (in relation to the higher rate tax payers), as a result of the receipt of franked dividends.
Although there is no doubt that they obtain an absolute advantage as a result of their lower tax rates, this will be the case regardless of the level of franking.
Myth 3: Markets wrong price benefits for franking
It is often suggested that the shares offer a fully franked dividend to provide benefits not available from unfranked shares. We hope that the above discussion will challenge those with this viewpoint on the review.
However, even if they remain convinced that the discussion, it is unreasonable to expect that market share would be adjusted to allow the alleged disparity.
Share markets are very efficient. They soon join all known information and bias in stock prices. franking level shares a secret and any use of (real or perceived) is almost certainly already reflected in prices.
If you think you will get a greater benefit to purchase shares in the share unfranked franked, then surely that would be willing to pay slightly more for the franked proportion compared with the share unfranked. Investors will continue to pay for each franking benefits, while a higher price exactly offsets the benefits.
Share markets simply do not allow any obvious inefficiencies or "free lunches" to persevere.
Myth 4: super-smart investment strategy - fully franked, high yielding Australian shares
investment strategy that emphasizes the level of franking is also likely to focus on higher dividend paying stocks, in order toto increase the the perceived benefit .
In defiance of the other elements of a sound investment philosophy, this approach implies the expectation of higher revenues and lower growth returns, effectively ignoring the relative tax advantage of tax on capital gains from income tax.
capital gains tax provides a better opportunity for tax administration of franking. Tax can be discounted, and delayed (sometimes indefinitely), reduce the overall tax rate.
franked dividend investment strategy is flawed ...
In our opinion, the investment strategy based mainly on the exploitation of the perceived benefits of fully franked shares is naive.
While franking should be a consideration, as the driver of the investment strategy of the game down (or even ignore) the importance of the primary variables in the equation of building a portfolio - the risk, liquidity risk, expenses and taxes, a comprehensive approach.
investment strategy that considers the broader issues is far more likely to meet your long-term needs.
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