Peter Switzer: Hello, and welcome to Switzer Investing Insights brought to you by nabtrade. Before the election, the debate about the franking credit highlighted that the fact that many investors were overly exposed to narrow group of dividends paying stocks. Notwithstanding the Morrison government has been returned. It’s still prudent to think more widely about diversifying your portfolio of investments and today we would like to look at the alternatives to fully franked shares.
Paul Rickard: But before taking a look at the alternatives, let’s provide a basis to compare franked with unfranked distributions. We do this by grossing up the franked distribution for the benefit of the franking credits– so that a 7% franked distribution is the same as 10% unfranked distribution. The table on screen shows the comparisons – a 3.0% franked distribution is worth 4.3% unfranked, 4.0% franked s worth 5.7% unfranked..
Peter Switzer: Okay, let’s move onto the investment alternatives, starting with stocks and securities listed on the ASX.
Paul Rickard: Yeah, let's talk about the three types of securities or stocks that are alternatives to fully franked investments. The first one is real asset stocks. These are trusts that own and operate physical assets. A classic example are property trusts, of course they own commercial office buildings, shopping centres and industrial parks. Leaders include GPT, Dexus and Scentre Group.
Paul Rickard: There are also utility companies such as APA that owns gas pipelines, or Spark Infrastructure with its electricity networks and transmission lines. Infrastructure providers include Transurban with its toll roads, Sydney Airport and Auckland International Airport. These stocks operate like a trust and pass through their net income as a distribution and you then become liable for the tax. Yields vary from around 4.0% to 7.0%.
Paul Rickard: Importantly, they provide reliable annuity-like distributions. Typically lower risk, with the risk depending on the quality of the assets, the level of gearing, and the manager's expertise.
Peter Switzer: Okay, there are also financial asset trusts to consider.
Paul Rickard: Yeah, as opposed to real asset trusts, these are trusts that own financial assets. So for example, corporate bonds, mortgages, debt securities and other types of financial assets. There's actually been a plethora of new issues in this space in the last 12 months or so, most particularly in things like credit funds. So, we've had the Perpetual Credit Income Trust which is about to IPO, Metrics Credit have bought a couple of trusts, and an international player with the Neuberger Berman Global Corporate Income Trust under the ASX code of NBI.
Paul Rickard: They provide returns of around five to eight percent or even higher. Distributions can be paid monthly, and again, the risk in investing in these type of trusts really depends on the underlying assets.Is it for example, an investment in a trust that owns investment grade bonds, or non-investment grade bonds? If you are investing in higher risk assets, you of course want to receive a higher yield. Another factor to consider is the manager's approach to diversification.
Peter Switzer: Okay, and Paul, the companies that don't pay franked dividends?
Paul Rickard: There are several companies that don't frank their dividends. Mainly because they earn a lot of their income offshore, Peter. They're paying tax offshore, but not to the Australian Taxation Office, therefore, they can't frank their dividend. They come from a wide variety of sectors and industries, and on the screen in front of you, you can see some of the largest companies measured by market cap.
Paul Rickard: Sector leaders such as CSL with a forecast yield of 1.3%, Amcor on a forecast yield of 3.9%, and even Macquarie, which is 45% franked, yields 4.7%. But you've got names like Janus Henderson, Lend Lease, Pendal, Oil Search. Yields will depend on the type of company, and range from anything from 1% to as high as even 6%.
Peter Switzer: We haven’t talked about investing offshore. That’s another option – to increase your exposure to overseas shares?
Paul Rickard: That’s right. And if you don’t want to invest directly into overseas companies, it is easy to do on the ASX via Exchange Traded Funds or ETFs – such as with iShares IVV which tracks the US S&P 500, Vanguard’s VGS which tracks an international all share index, or active style fund’s such as Magellan’s MGE. There are also listed investment companies specialising in overseas shares .
Peter Switzer: Diversification remains a really fundamental premise about investing. We all know about “don’t put all your eggs in the one basket”, but it is also because different assets when combined together can also produce better risk adjusted returns. There is no shortage of investment opportunities listed on the ASX that can help you build a more resilient, diversified portfolio. Thanks for joining us on Switzer Investing Insights, brought to you by nabtrade.