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20 August 2021 | Newsletters

10 franked income stock ideas for Australian investors


10 franked income stock ideas for Australian investors
A report by Gareth James from Morningstar Equity Research

Every cent counts if ‘there is no alternative’ to equities

Income investors face a challenging environment following repeated interest rate cuts which have caused asset yields to compress. The Reserve Bank of Australia’s indication that its target cash rate won’t increase until at least 2024 has caused some investors to claim “there is no alternative” to equities as a source of yield. In Australia, dividend payout ratios are relatively high due to the dividend imputation system, which returns corporate tax to Australian resident taxpayers via franking credits with dividends, creating additional income for Australian resident taxpayers.

Morningstar’s fair value estimates exclude the value of franking credits because they only have value to Australian resident taxpayers. However, franking credits can materially increase the income earned from Australian equities by Australian resident taxpayers. Contrary to a common misconception, the gross value of franking credits does not vary with a shareholder’s marginal rate of tax and is equivalent to other sources of gross income, such as bank interest and dividends on shares.

We’ve identified 10 franked income stock ideas from our Australian and New Zealand coverage list of 189 stocks… Read the full report here.