Share market dip is bringing in new buyers - should they chase unfranked or fully franked dividends?

As the Australian share market dips in response to global economic uncertainty, many new and younger investors are entering the market looking to pick up bargains. According to Alex Jamieson, leading financial advisor and founder respected financial advisory firm, AJ Financial Planning, this presents both opportunity and risk especially for those drawn to shares that pay dividends.
 

"One of the most common questions we're hearing right now is whether new investors should focus on shares that offer fully franked dividends," Jamieson said.
 

"The short answer is but it depends on your financial goals, your tax situation and your time horizon."
 

What is a fully franked dividend?

When a company pays a dividend, it may come with what's known as a franking credit which is a tax credit that reflects the tax the company has already paid on its profits.
 

"A fully franked dividend means the company has paid the full 30 percent company tax and the shareholder receives a credit for that when they lodge their tax return," Jamieson said.
 

"It prevents double taxation and is particularly valuable for retirees and lower-income investors who may receive a refund."
 

What is an unfranked dividend?

By contrast, unfranked dividends don't carry any tax credit, meaning the entire payment is taxable at the investor's marginal rate.
 

"For investors in higher tax brackets, or those looking to grow capital over income, unfranked dividends can be less attractive," Jamieson said.
 

Should new investors focus on dividend stocks?

Jamieson said that while high-quality dividend-paying shares, particularly those with full franking, can offer income and tax advantages, they're not always the best strategy for younger investors.
 

"If you're in retirement or nearing retirement, fully franked dividend stocks can provide stable income and valuable tax benefits," he said.
 

"But if you're younger and focused on long-term wealth building, growth stocks may be more appropriate, even if they don't pay dividends."

He added that many new investors are currently being drawn to sectors like banking, energy and infrastructure, where fully franked dividends are more common.
 

"These sectors can be attractive, but investors need to do their homework," he said.
 

"Dividends are only one part of the picture. You also need to understand the company's fundamentals, debt levels and how it's likely to perform in a changing economy."
 

Final thoughts

Jamieson urged new investors to seek advice before chasing dividend-paying shares without understanding their full impact.
 

"Dividends can be great, but they're not free money. You're getting a portion of the company's profits and that can affect future growth," he said.
 

"The most successful investors are the ones who align their investment strategy with their life stage and financial goals, not just market trends."
 

About Alex Jamieson
 
Alex Jamieson is the founder of Melbourne-based advisory firm, AJ Financial Planning. With a firm belief in responsible investing, Alex crafts investment portfolios for clients that not only meet their financial objectives but are also sustainable and match their ethical values.
 
A highly respected financial advisor, Alex is considered one of the country's leading experts on all matters financial planning, investing and retirement.
 
http://www.ajfp.com.au/