The benefits of franking credits
Dividend payments, and the franking credits that come with them, can be very handy come tax-return time.
Gearing to increase exposure to franking credits
Being a flexible line of credit, a margin loan can be used for a variety of strategies, both short and long-term. One of the popular shorter-term uses is to gear into “dividend season,” to increase your exposure to fully franked dividends.
In February and August, the listed companies with June 30 and December 31 reporting dates – which means the majority – declare their dividends, as part of their interim or full-year results, for payment in March/April or September/October. Investors can use their margin loan to buy the stocks to pick up these two dividends.
When a company announces a dividend (or distribution), it announces the “ex date,” the date on which the stock will trade “ex-dividend,” and the “record date.” Only shareholders who are on the share register on or before the record date are eligible to receive the dividend. So, to pick up the dividend and associated franking credits, you have to act by the ex date.
Why use a margin loan?
A margin loan from Leveraged can be used either to buy a greater amount of one of your stocks, to increase your dividends from it, or to establish new holdings of the best franking credit generators. Gearing into franking credits is a popular short-term trading strategy in dividend season: not only can you pick up the dividend and associated franking credits, you can also take advantage of the “dividend run-up” phenomenon – historically, on average, many ASX stocks have made above-market returns over the period encompassing their profit/dividend announcement dates and ex-dividend dates.
Investors contemplating this strategy must be aware that if they are intending to claim franking credits above the value of $5,000 for a financial year, they must own each stock from which they derive franking credits for at least 45 days. (While this is known as the “45-day rule,” because the purchase and sale date are included, it is really a “47-day rule.”)
Investors should also remember that Westpac Banking Corporation, National Australia Bank and ANZ Banking Group – three popular stocks for this strategy – rule off their books for the year on September 30 (and March 31 for the half-year): these companies usually announce their results in October (full-year) and April (half-year), meaning that they pay their dividends about a month later.
Important information
Gearing involves risk. It can magnify your returns, however it may also magnify your losses.
Leveraged Equities Limited (ABN 26 051 629 282 AFSL 360118) is a subsidiary of Bendigo and Adelaide Bank Limited (ABN 11 068 049 178 AFSL 237879).
Information is general advice only and doesn't take into account your personal objectives, financial situation, or needs. The views of the author may not represent the views of the broader Bendigo and Adelaide Bank Group of companies (“the Group”). This information must not be relied upon as a substitute for financial planning, legal, tax or other professional advice. You should consider whether or not the product is appropriate for you, read the relevant PDS and product guide available at www.leveraged.com.au, and consider seeking professional investment advice.
Examples are for illustration only and are not intended as recommendations and may not reflect actual outcomes. Past performance is not an indication of future performance. The information provided in this document has not been verified and may be subject to change. It is given in good faith and has been derived from sources believed to be accurate. Accordingly no representation or warranty, express or implied is made as to the fairness, accuracy, completeness or correction of the information and opinions contained in this article. To the maximum extent permitted by law, no entity in the Group, its agents or officers shall be liable for any loss or damage arising from the reliance upon, or use of the information contained in this article.
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