Franking credits: Don’t push the envelope

In a yield crazy market some investors might be tempted to take more risk. We explain why getting racy with franking credits is only for the brave, or foolish.

The Australian market is experiencing insatiable investor demand for franked dividends. If a share pays a decent yield it’s getting lapped up. In this environment there’s a danger investors might push the boundaries to get more franking credits, particularly if dividend imputation) and warned you not to get too carried away chasing it. All other things being equal, an unfranked dividend of 8% is better than a franked dividend grossed up to 8%, since you don’t have to wait for the franking credit refund to arrive.

If you’re holding shares short term, hedging your positions or doing complicated trades you also need to take care. You might not be entitled to the franking credits you expected.

To explain, let’s start with some history.

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