Should you buy AMP Limited shares for its franked dividend?

Shares in AMP Limited (ASX: AMP) are down one cent today to $5.41 but more importantly the stock has now lost nearly 14% in the past six months. In comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is down 9% over the same period.

While the recent share price weakness may be disappointing for shareholders, for prospective shareholders – whether that is making AMP a new position in your portfolio or upping your stake – the current share price weakness should be viewed as a positive, as it creates an opportunity to acquire a blue chip stock at a more attractive price.

AMP’s capital growth potential is reasonable considering its strategic move into China and the group’s market-leading exposure to the domestic financial services industry, however, for many shareholders the prime attraction of the stock is the group’s stream of dividends.

Franking matters

While alternative income stocks such as Telstra Corporation Ltd (ASX: TLS) or Wesfarmers Ltd (ASX: WES) are offering yields based on financial year 2016 forecasts of 5.8% and 5.2% respectively, AMP is forecast to pay 5.4%.

Those yields however fail to tell the whole story. The key difference between these three yields is that while Telstra and Wesfarmers pay fully franked dividends, AMP’s dividend is only partially franked – in 2014 it was 80% franked. This means that investors need to receive a higher yield from AMP just to achieve the same after tax yield that they get from Telstra or Wesfarmers.

Given that AMP’s yield doesn’t compensate for its partial franking compared with these two other blue chips and given its long term growth outlook is arguably roughly in line with other blue chip stocks who all have to contend with the fact that they are already very large, market-leading businesses, shares in AMP don’t in my opinion look particularly appealing for income-focussed investors.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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