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Oncore Wealth: How to generate income in low interest rate environments

Published 16th December 2014

The current season of AGMs have allowed companies to guide investors on the health of their businesses, as well as update the market on how objectives are tracking for the year. The RBA looks to be leaving rates on hold, or even dropping them again in the first quarter of 2015. Australia’s commodity exports are subdued thanks to a growth slow-down in China and our Aussie Dollar is weakening, but not to the point where it becomes undervalued, so all-in-all we are in a low-growth environment.

As we head into the Christmas period, the overriding question on the lips of investors is“How can we generate income in an environment with such a low interest rate?” The answer is to look for investments with strong underlying revenue streams, a strong balance sheet and consistent fully-franked dividends. To generate the required income it is hard to go past our leading companies such as the ‘Big Four’ banks, Telstra and Woodside Petroleum; all of which are paying a combined average, grossed-up yield of around eight per cent per annum.

Off the back of a slight correction in September, the US dollar is now stabilising, which in our view will lead to normalisation in equities. We believe this may be a good time to pick up discounted blue chip stocks and high quality dividend payers to take advantage of some higher returns. 

The selection of blue chip shares within your portfolio usually comes with the added bonus of a franking credit of up to 30 per cent. Franking credits are pre-paid tax on franked dividends from shares issued to the shareholder. This means if your tax rate is below 30 per cent, like that of your Super Fund at a cool 15 per cent, then the extra 15 per cent can be added to your overall return on investment and paid in the form of a tax refund back to your fund annually.

Practical example of fully franked shares in Super:
Imagine this: You bought 500 ANZ shares prior to them going ex-dividend at the start of November for $31.50 per share. ANZ called a dividend amount of 95 cents per share on 7 November, due to pay mid-December. ANZ will pay $475 plus a $204 franking credit, totalling $679. If the Super Fund only pays tax at 15 per cent, you will receive the extra 15 per cent franking credit back as a refund, grossing up your total to $575 after tax.

If ANZ repeats this dividend again at 95 cents in May 2015, then you would have received a total income of $1,150 or 7.3 per cent after tax for nine months of investing within your Super Fund.

Investing in direct equities via superannuation with a longer time horizon allows us to compound dividends and gain the benefit of the excess franking credits due to the super fund’s concessional tax environment.

The next round of company dividends will be reported in February, so now is the time to position yourself to get the best of the returns and franking credits on offer.

Contact Stacy Barnes at Oncore Wealth Solutions on 1300 654 484 to chat about your options.