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Beginner · Lesson 7 of 8Dividends and franking credits
A dividend is a cash payment from company profits to shareholders. To receive it you must own the share before the ex-dividend date; buying on or after that date means the seller gets it. The share price usually drops by about the dividend on the ex-date, so dividends are not free money.
Australia has dividend imputation. If a company has paid 30% tax on its profit, its dividend can carry franking credits for that tax. You include the credit in your taxable income and then get it as a tax offset, so tax is not paid twice. If your tax rate is below 30%, excess credits can be refunded.
A fully franked 5% yield is worth about 7.14% before tax (5 / 0.7). This "grossed-up" yield is why franked dividends are popular with retirees and super funds.
Formula
Grossed-up yield = cash yield / (1 - 0.30 x franking %)
Example: 5% yield, 100% franked: 5 / 0.70 = 7.14%.
Key takeaways
- Own the share before the ex-dividend date to get the dividend.
- Price usually falls by about the dividend on the ex-date.
- Franking credits pass on company tax already paid.
Check your understanding
1. A fully franked dividend yield is 4.2%. What is the grossed-up yield (30% company tax)?
- 4.2%
- 5.0%
- 6.0%
- 7.0%
Show the answer
6.0%. 4.2 / 0.7 = 6.0%.
2. You buy a share on its ex-dividend date. Who gets the dividend?
- You
- The seller
- Split 50/50
- Nobody
Show the answer
The seller. From the ex-date the share trades without the dividend.
Go deeper
- Wikipedia: Dividend imputation
- YouTube videos: franking credits explained australia
- Investopedia: franking credit
- ATO: franking credits
- Moneysmart (ASIC): dividends
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