Historically, high yielding dividend income shares have been considered boring and stodgy. The sort of shares unlikely to outperform the market. But if your after steady long term returns with the bonus of tax credits, these stocks could add glamour to your portfolio.
Total Stock Return Includes the Dividends
The total shareholder return represents the change in capital value of the shares plus dividends, expressed as a plus or minus percentage of the initial value, usually over a period of 1 year. It is often accumulated over longer periods of 3 or 5 years to show returns for longer holding periods.
The income stocks figure should also take account of any special one-off dividend payments, as well as regular dividend payouts. As well, in Australia we should include franking credits.
It is possible that a stock could deliver a negative price performance over a certain period yet still generate a positive total shareholder return as the dividend paid can outweigh the stock price fall.
Franking Credits are the Cream on the Cake…
Australian share investors have something to smile about despite the market volatility, its because of the way they receive their dividends. Depending on the shareholder’s personal tax position, they will be paid the dividends on their shares with the tax fully paid already — there’s no further tax to pay on them. In some cases their dividends will give them a tax credit and possibly even a tax refund.
The easiest way for an investor to value a franked dividend is to think of the franking credit as part of the income they receive. The investor doesn’t get it in cash, only as a kind of IOU from the tax office, but nonetheless it and the cash portion make up pre-tax income. So a fully franked dividend of $0.70 plus $0.30 credit is exactly equal to an unfranked dividend of $1.00, or to bank interest of $1.00, or any other ordinary income of that amount. (It’s equal as franking is fully refundable, as described earlier.)
The effect dividend imputation has on individual shareholders depends mainly on two things – your own taxable income, and how much tax the company paid, (or, equivalently, what franked dividends it received itself) before it distributed a dividend. In some cases, a shareholder can actually pay less tax after receiving income than would have been payable without it.
Look at Dividend History and Forecast when Choosing Shares
Target reliable dividends that grow steadily over time. Yields greater that 10% may indicate the stock is in trouble and the dividends may soon dry up completely.
Finance theorists use forecast dividends to value shares. One method is to take the current dividend and divide it by the risk free rate less the forecast dividend growth rate. The greater the growth rate the greater the share valuation.Dividend forecasts are what many investors use to assess prospective share investments.
The health of a company can be measured by its ability to generate earnings and growing dividend streams. If dividends are historically reliable and expected to grow consistently, then the share price appreciation will look after itself.
