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How I’d reposition a $1,000,000 retirement portfolio for franking credit changes

Retirement portfolio management

There’s little doubt Australia is a dividend-loving country, with some of the highest average dividend payout ratios in the world.

One of the biggest historical reasons for our love of dividends is our unique tax treatment of dividends, known as the dividend imputation tax system. In Australia, companies distribute a “grossed-up” dividend to investors from their after-tax profits, with a “franking credit” attached which allows investors to claim back this amount on their personal income. While the rationale is that investors don’t pay tax twice, the reality is many investors (particularly retirees) have been able to receive cash refunds from high dividend portfolios and live purely off dividends in retirement.

But this looks set to change this year.

If, as the polls would suggest, the Australian Labor Party is elected in the May 2019 Federal election then Labor will look to strip away the cash refund benefit that retirees (and more specifically, self-managed super funds) currently receive from dividends.

While I’m no expert in taxation advice, I am interested to see what will happen to those juicy, fully-franked dividends that we hold so dear in Australia – looking at you Alumina Limited (ASX: AWC) and National Australia Bank Ltd. (ASX: NAB).

While the 8-10% yields on some of these top dividend stocks may appear attractive, a change of Government in May could turn these stocks on their heads. This is particularly the case for blue-chip, big dividend stocks including the Big Four banks and Telstra Corporation Ltd (ASX: TLS) which have significant shareholders in the SMSF boat. By reinvesting in the company and looking to drive capital growth, these companies could actually become more effective for their shareholders and deliver further upside.

I think it’s worth considering some growth stocks in the interim. I’m a big fan of Regis Resources Limited (ASX: RRL) in the metals and mining sector which has quietly been on the rise in the last 6 months, and should we see more market volatility I would expect further demand for gold

With the current structural factors supporting iron ore at the moment, blue-chip miner BHP Group Ltd (ASX: BHP) could also be worth a look to capture short-term upwards pressure on iron ore prices until the political landscape in Australia looks more certain in June.

With the RBA on Friday slashing its GDP growth forecast for Australia from 3.25% to 2.50% for the 12-month period ending 30 June 2019, the growth story may be too risky for some. Capital stability and countercyclical stocks could provide a good defensive hedge in these times, with the likes of Wesfarmers Ltd (ASX: WES) or AGL Energy Limited (ASX: AGL) falling into this category for mine.

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Returns As of 6th October 2020

Motley Fool contributor Lachlan Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Wesfarmers Limited. The Motley Fool Australia owns shares of National Australia Bank 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.

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