Fully-franked dividends are a gift, but don't rule out going global for income

I’m not sure if it was fully realised at the time, but the dividend imputation reforms undertaken initially by the Hawke-Keating Government in 1987, and the subsequent amendments under the Howard-Costello government in 2000, have been a profound gift for Australian retirees.

While the guaranteed interest of a term deposit offers peace of mind, returns often look "pretty skinny" once inflation is factored in. For those seeking tax-efficient yield, the opportunity presented by ASX-listed companies remains a significant structural advantage.

To put some numbers around this: the average yield from the ASX 200 over the past decade has hovered around 4.5% per annum. For tax-effective investors, that figure rises to a grossed-up yield of between 5.5% and 6%.

Dr Don Hamson, Managing Director of Plato Investment Management, recognised the unique appeal of this system early on. Plato’s flagship Australian Shares Income Fund has leaned into this opportunity, delivering a 9.3% yield since its inception in September 2011.

As part of Livewire's Retirement Mini-Series, I spoke with Don about the ASX dividend landscape, the risks of portfolio concentration, and the untapped potential for income from global equities.

The mirage of averages

Averages, however, can mask uncomfortable truths. Currently, the roughly 3% headline yield on the ASX 200 is notably depressed compared to historical norms. Even when accounting for franking credits, that figure only climbs toward 4%.

Digging deeper reveals both the resilience and the fragility of the ASX dividend stream. Banks and resource companies account for almost 50% of the total dividends flowing from our market. While these are our largest and most enduring institutions, they are not immune to industry headwinds.

“The reason the yield of the index is so low is largely explained by the banks and the miners,” Hamson explains. 

“CBA’s share price has gone ballistic, and its yield has consequently been lower than the market average.”

The peak for resource-driven income occurred in 2022, fuelled by giants like BHP, Rio Tinto, Fortescue, Woodside, and Santos. Since then, many of these heavyweights have effectively halved their dividends.

Navigating the current landscape

For those managing a portfolio today, Hamson suggests the message differs depending on your entry point:

• Long-term Holders: If you have owned Australian shares for decades, the current yield is likely a secondary concern. You have benefited from substantial capital gains and likely remain in these positions to avoid realising significant tax liabilities.

• New Capital: For those putting fresh money to work, Hamson offers a word of caution. The market's low yield may be a signal that stocks are expensive and potentially due for a pullback.

• Concentration Risk: This risk is exacerbated by extreme concentration. Just seven stocks account for nearly half of the dividends from the ASX 200. If a recession hits and bad debts rise, or if commodity prices slump, your income stream could take a significant, correlated hit.

Challenging the Myth: "Global for growth, Aussie for income"

Given the concentration of the local market, diversification is Hamson’s mantra. This applies not just to his Australian equity strategy, but to his view that global shares represent an often-overlooked income opportunity.

There is a popular market adage: “Go global for growth, stay local for income.” Hamson believes this is a misconception. While buying the MSCI World Index yields less than 1.5% at a headline level, active selection changes the narrative entirely.

“The world is your oyster,” Hamson says. 

“There are only 200 to 300 reasonably sized companies in Australia that pay dividends. Globally, we track 10,000 stocks in developed markets and 16,000 including emerging markets.”

For many Australian retirees, CBA is the gold standard. However, Hamson points out that some continental European banks are currently offering 5% to 6% cash yields - a premium to CBA's dividend even after the value of franking credits is included.

While the US market often discourages dividends for tax reasons, looking beyond the major indices reveals a wealth of opportunity. Plato's Global Shares Income Fund has generated nearly 6% cash income (after fees) over the last decade.

While seven stocks dominate the ASX income stream, the top seven dividend payers in the MSCI World Index represent less than 10% of the total global income pool. Furthermore, a global approach provides exposure to sectors virtually non-existent at home, including tech giants like Apple and Microsoft, which are increasingly using buybacks and dividends to return value.

The "gift" of the Australian dividend system remains one of the best tools for a local retiree. However, our unique tax structure can encourage investors to "put all their eggs in too few baskets." By broadening the aperture to include global income, investors can smooth out volatility and ensure their retirement is not entirely dependent on the fortunes of a handful of local banks and miners.

Managed Fund

Plato Australian Shares Income Fund

Australian Shares

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Managed Fund

Plato Global Shares Income Fund

Global Shares

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