In a low rate environment, the income or cash flow that an investment provides is important, particularly if you rely on this income to fund your living expenses. While comparing options, you must of course consider their investment horizon and the associated capital risk of the underlying investments over this period. But equally, you must not forget the potential for that income to grow over time.
To illustrate the vastly different potential outcomes over the long term, consider the analysis below from AMP Capital, when contrasting the results in 2016 from having invested $100,000 in December 1979 in either:
i) a one-year term deposit or ii) the Australian share market.
The term deposit would still be worth $100,000 and paid roughly $2,450 in interest, while the shares would have grown to $1.12 million in value and paid $51,323 in dividends before franking credits.
Are you eligible for the franking credit rebate?
Given the dividend imputation system in Australia, which effectively allows companies to pass on a tax credit to their shareholders for tax already paid, the effective after-tax dividend income received by investors may in fact have been more than outlined above. This would certainly be the case for an SMSF investor in pension phase whose income is tax exempt, and as such can take full advantage of the franking credit rebate to supplement their income.
The proviso is that if the investor is entitled to $5,000 or more of franking credits, they must have held the shares for at least 45 days (not counting days of purchase or sale, so in effect 47 days) to be eligible to receive the refund.
WARNINGS AND DISCLOSURES: This material has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this material is General Advice and does not take into account any person’s individual investment objectives, financial situation or needs. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances, alternatively seek professional advice. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a Product Disclosure Statement (“PDS”) relating to the product and consider the PDS before making any decision about whether to acquire the product. You will find further details of the service we provide and any cost to you within the Financial Services Guide. Any references to past investment performance are not an indication of future investment returns. Prepared by EP Financial Service Pty Ltd ABN 52 130 772 495 AFSL 325 252 (“Elston”). Although every effort has been made to verify the accuracy of the information contained in this material, Elston, its officers, representatives, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this material or any loss or damage suffered by any person directly or indirectly through relying on this information.
EP Financial Services Pty Ltd
ABN 52 130 772 495 AFSL 325 252 (“ELSTON”)
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