Why dividends, growth and franking

matter in the world of Trumpflation

Paul Rickard

Trump has been great for US equities, okay for Oz

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US S&P500 vs S&P/ASX 200

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Better with dividends

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US S&P500 TOTAL RETURN vs S&P/ASX 200 TOTAL RETURN

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Australia for income, ROW for Growth

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A world of opportunities…

• Long term outperformance

• Aussie market just 2% - 98% of opportunities outside Oz

• Overweight banks and resources, underweight IT

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Sector weights - Australia vs USA

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Based on GICS® sectors. The weightings for each sector of the index are rounded to the nearest tenth of a percent; therefor, the aggregate weights for the index may not equal 100%. As of 30 June, 2017

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Aussie dividends are higher

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And that’s before franking

• System is unique to Australia. Called dividend imputation – more colloquially referred to as “franking”

• Introduced by Paul Keating – aim was to prevent the double taxation of company profits

• Only companies that pay Australian company tax can frank their dividends

• Companies with overseas earnings, or carry forward tax losses, often can’t frank their dividends

• All taxpayers receive the same benefit

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The power of dividend imputation – how does it work

• Both the dividend received in cash, and the franking or imputation credits (non cash) are included in your assessable income

• Tax is then assessed at your marginal rate

• Franking credits then act like a tax offset – and reduce the tax payable

• Unlike other tax offsets, if franking credits can’t be used, they are refundable in cash

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Example – dividend of $70 in cash, franking credits of $30

47% 39% 30% 15% 0%

Dividend (cash) $70 $70 $70 $70 $70

Franking Credits $30 $30 $30 $30 $30

Assessable Income $100 $100 $100 $100 $100

Tax Payable $47 $39 $30 $15 $0

Less Franking Credits $30 $30 $30 $30 $30

Net Tax Payable (cash) $17 $9 $0 -$15 -$30

Tax Refund (cash) $15 $3010

Who benefits• All taxpayers who can use franking credits (Australian residents)

benefit

• Gross up franked yields to compare with other investments (eg. interest, rent, unfranked dividends), or calculate after- tax yield

• After tax yields

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Franked Yield 0% tax 15% tax 47% tax

3% 4.3% 3.6% 2.3%

4% 5.7% 4.9% 3.0%

5% 7.1% 6.1% 3.8%

6% 8.6% 7.3% 4.5%

7% 10.0% 8.5% 5.3%

My favourite investment slide

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Dividends vs Term Deposits – increasing income!

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BHP Dividends

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What is dividend growth

• Companies that have the capability to grow their dividends

• If a company can grow its earnings per share, pay higher dividends,

then over the long term, the market will pay a higher price (growth)

• More relevant in Australia because taxation system favours payment

of dividends

• Franking credits only valuable in hands of shareholders

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Switzer Dividend Growth Fund

• Aims to provide investors with tax effective income and capital growth by investing in a core portfolio of blue-chip Australian shares

• Switzer Asset Management – Peter Switzer, Charlie Aitken, George Boubouras & Paul Rickard

• ASX quoted - SWTZ

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Peter Switzer Paul Rickard

George Boubouras Charlie Aitken

Portfolio

• 30 to 50 stocks, drawn from the largest 200

• Dividend growth

• Attributes:• Sound balance sheets

• Desirable dividend stream & capability to grow

• Preference for franking

• Moderate to low volatility

• Aussie shares 80% to 99%, Cash 1% to 20%

• Fund now $66m

• Learn more: 11.45am Verandah Room

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Summary

•Australia for tax effective income, ROW for growth

•Dividend growth

•More info on SWTZ – go to

www.switzerassetmanagement.com.au

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