Scott Francis's recent article, Coalition franking cuts to bite, revealed to me for the first time that overseas investors cannot claim franking credits. This seems to mean that companies that pay franked dividends are more valuable to Australian taxpayers than foreign investors. Could you please tell me what the motivations are for companies to pay franked and unfranked dividends? Are there laws governing profit size, that require upfront company tax being paid? Is it too costly for small companies to administer the distribution of franking credits? Are all gross company profits tax deductible once those profits have left the company as distributions?
Scott’s response: Thanks for your letter. It is interesting that many overseas investors don't benefit from franking credits. I think what becomes more interesting is when we look at tax systems (eg the USA) where there are no franking credits. Suddenly dividends are fully taxable, and capital gains (which are not taxed until sold) look more attractive in comparison. Perhaps this is why USA shares have such a low dividend yield.
From an Australian perspective, the advantage of a company in paying fully franked dividends is that they are using up the dividends that they have earned from paying company tax. It does not cost them anything to use franking credits that they have - and most Australian investors benefit from them.
Even quite small companies, for example companies set up just for a family business, have the capacity to pay franking credits provided they have paid some company tax. They can use that payment of tax to pay a fully franked dividend.
Since joining Eureka Report I have bought and traded several listed companies, especially your small cap recommendations and have been very pleased with the result. My outstanding buys have been Ausdrill also Monadelphous. Do you have any further thoughts on especially these two shares? Thank you so much for your investment ideas.
Editor’s response: Thank you for your letter. We regularly provide updates on listed companies in Eureka Live. Recently, Ian Verrender wrote on Monadelphous and the broader mining services sector (see: Mining services not dead yet). John Abernethy also wrote about Monadelphous in an article published last month, Value stocks in a cooling economy.
Brendon Lau discussed Ausdrill in a recent article, The value vault: our picks.
I appreciate the importance of websites like Eureka Report, educating people about investment and empowering them to understand and control their own financial future. However, my interest is in taking this one step further and getting people to understand the latent power of their savings in directing company management behaviour.
It is retirement savings of each of us that provide the wall of money that has created the enormous fund management industry in Australia but these institutional investors do not recognise and reflect the values and priorities of people that provide the money that they invest to the senior management of companies. Indeed, mostly they worry that any stakeholder engagement effort they make will be a cost that they bear and then their competitors will piggy back off them. They certainly don't collect data on the values and ethics of their investors. I think this is an important next step of the democratization of investment.
I am nearing retirement within the next few years. I have been with my industry super fund for over thirty years and have had different investment options over that period. I understand that there are pros and cons/ ups and downs of the various investment options. I don't believe that I have the knowledge or experience to run my own SMSF but like all members of super funds aspire to the best returns possible. I believe that some commercial (non industry) super funds exist that may have a history of providing better returns than most t the industry funds. I also understand that past history does not mean like future history of returns. Can you provide some advice regarding some of the better performing super funds and whether an individual’s funds under their management are secure.
What would your choice be for selecting a superannuation fund or super investment method to keep things simple but with the opportunity for reasonable returns?
Keep up the good work.
Editor’s response: Thanks for your letter. The Australian Securities & Investments Commission (ASIC) has a helpful list of tips for people looking to choose or change super funds. You can access the website here. It also provides a number of super comparison websites so you can see the best performing funds.
Overweight or outperform?
Could Eureka Report explain what overweight and outperform mean?
Editor’s response: Thanks for your letter. Overweight and outperform are used instead of “buy”. At Eureka Report, we generally use three ratings: outperform (buy), neutral (hold) and underperform (sell).