Plato Investment Management Portfolio Manager, Dr Peter Gardner says too many retirees are missing out on additional income because their Australian equity portfolios don’t take full advantage of Australia’s taxation system.

“With interest rates at historic lows we find ourselves in a position where more income can be generated from franking credits alone, than cash investments such as term deposits,” said Dr Gardner.

“Many pension phase and tax-exempt investors we speak to remain surprised that one dollar of pre-tax income from fully franked dividends is actually worth $1.43 to them after receiving the franking refund. This is despite the significant attention franking received at the last Federal election.

“As an investment firm specialising in retirement income, we campaigned against moves to abolish franking credits at the last federal election, now we see why they’re so important as retirees continue to be hit by rate cuts which are destroying their income from other asset classes.

“Fortunately, dividend income remains relatively strong and franking credits remain in place.”

Dr Gardner says in the current market the mining sector is leading the pack when it comes to franking yield returns.

“Fortescue Metals is currently paying a gross income of 14.5%, including a franking yield of 4.3%. We expect this to be sustainable in the foreseeable future and believe there remains a positive outlook for the price of iron ore.

“Rio Tinto and BHP are other notable dividend payers at the moment which offer retirees the additional benefit of fully franked dividends.

“A focus on investing in companies that offer franked dividends in a no-brainer for retirees, but unfortunately we find many aren’t doing this, the same goes for tax effective buybacks which can also add considerable after-tax alpha when on offer.

“Retirees should assess the management of their equity portfolios to ensure they have a bias towards franked dividends and take advantage of other tax-effective opportunities such a buybacks.

Over the past 12 months, Plato’s Australian Shares Income Fund has generated gross income of 7.7%. 2.2% of which has been franking yield.

This article was published by The Australian on November 23, 2020

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