Do you love tax-effective dividends? Here are 3 ASX share ideas

National Australia Bank Ltd. (ASX: NAB) shares, Telstra Corporation Ltd (ASX: TLS) shares and Blackmores Limited (ASX: BKL) shares offer fully franked, potentially tax-effective, dividends.

What are franking credits?

Franking credits are a form of tax credit paid by Australian companies to eligible shareholders. Basically, since a company pays tax on its profits and those same profits can be used to pay dividends to shareholders (who own the company), it would not be fair for the tax office to tax dividends again.

For example, if the ATO taxed company profits at 30% and then shareholder dividends at the shareholder’s tax rate, they would be taxing the profits (and owners!) of companies twice. Having franking credits allows the shareholder’s tax to be offset by the tax already paid by the company. 

There are eligibility rules for receiving franking credits — you should check the ATO’s website. Importantly, Australian residents must hold dividend-paying shares for 47 days to receive a tax credit against their name. The credit is automatically applied to the shareholder’s tax file number.

Ultimately, franking credits can boost after-tax dividend income.

3 ASX share ideas

Here are three ASX shares which pay fully franked dividends.

  1. NAB

National Australia Bank is Australia’s fourth-largest bank and is expected to pay a dividend of 5.9%. After we account for its franking credits, the ‘grossed up’ dividend yield blows out to 8.4%. Try getting that from the ban…

NAB is a leader in business banking throughout Australia and New Zealand and controls a chunk of the mortgage market. Following the divestments of its UK and US bank subsidiaries, NAB has a leaner and more efficient business model.

  1. Telstra

With Telstra shares down 21% over the past year, it currently yields a dividend of 7.3% fully franked. After franking, its gross dividend yield is over 10%!

Telstra shares have been sold down in what appears to be a general malaise sweeping over the local telecommunications industry. The rollout of the National Broadband Network (NBN) and increasing competition from the likes of TPG Telecom Ltd (ASX: TPM) and Vocus Group Ltd (ASX: VOC) have many analysts concerned about the industry’s growth prospects.

While risks persist, with its large and tax-effective dividend I believe the company could be drawing closer to the ‘buy zone’.

  1. Blackmores

Blackmores is Australia’s premier vitamins producer currently pursuing a growth strategy targeting Asian markets. Blackmores pays a 3.4% dividend fully franked (4.8% gross).

Arguably, what it lacks in dividend yield it makes up for with growth potential. Indeed, compared to NAB and Telstra the company is a higher-risk investment.

However, if it can continue to grow strongly over the coming five years, today’s share price could prove to be good value.

Foolish Takeaway

Thanks to franking credits, ASX share dividends can provide a tax-effective income stream to eligible Australian shareholders. Of the three companies listed above, I think Telstra is closest to a buy at today’s levels. However, I’d like to buy in at a price below $4.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of National Australia Bank Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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