There is a lot of water – not to mention an election – to pass under the bridge before Labor’s proposal to stop excess franking credits from dividends being refundable to low-tax-rate holders, but it has certainly caused yield-oriented investors to lift their focus from high-yielding fully franked dividend payers (see Paul Rickard’s article today to assess how it might affect you).
One of the places that investors are re-examining is the A-REIT (real estate investment trust) sector, which is once again a strong candidate for a yield portfolio.
The caveat there is that the REIT distributions are typically untaxed in the trusts’ hands and do not come with franking credits attached. Some of the REITs are stapled securities – where a unit in a property trust trades indissolubly with a share in a property company, and the latter may be active in property development, syndication, management and property services – thus giving rise to a small franking component. And there is often a small tax-advantaged component, arising from tax concessions, such as depreciation allowances and tax-deferred income, but this is not as effective in reducing an investor’s tax liability as fully franked dividends from shares – and in the self-managed super fund (SMSF) context, does not augment the yield to the SMSF in accumulation or pension mode.