The potential change to franking credits is focusing my attention on ASX growth shares.
Labor has promised to eliminate franking credit refunds for non-pensioners, although franking credits can still be used to reduce a tax liability.
This means that for people with taxable income under $18,200, they won’t get their franking credits back.
Suddenly that makes the attractiveness of Telstra Corporation Ltd (ASX: TLS), Commonwealth Bank of Australia (ASX: CBA) and Australian Foundation Investment Co. Ltd. (ASX: AFI) (AFIC) seem a little less good.
Australia has always been very generous with the dividend system because the franking credits is an added bonus compared to US or European shares, particularly for businesses where most of the returns come from dividends. I personally wouldn’t value Telstra shares as highly if I couldn’t get the full benefit of the franking credits.
Whatever your feelings on the issue, it will probably have an effect on dividend shares. That’s why I think growth shares would become more attractive – most of the returns are from capital growth, not dividends & franking credits.
Businesses re-investing into themselves at high rates of return will generate the strongest returns over the long-term, which also generally happens to be growth shares.
Charlie Munger has said himself that in short periods of time businesses that generate low earnings on the equity or assets can outperform, but over the long-term it’s the ones that generate high returns from their balance sheet that will generate big returns, such as REA Group Limited (ASX: REA) and Altium Limited (ASX: ALU).
One of the shares that would fit the growth share definition for a Labor era would be this growth stock which grew its profit by 30% in FY18.
You might not know this market leader's name, but it's rapidly expanding into a highly profitable niche market here in Australia. Even better, the shares boast a strong, fully franked dividend that should balloon in the years to come. In other words, we're looking at the holy grail of incredible long-term growth potential AND income you can watch accruing in your account in real time!
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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended REA Group Limited. 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 Scott Phillips.