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Do franking credits really matter with ASX dividend shares?

The Australia and New Zealand Banking Group (ASX: ANZ) set the share market on fire today when it revealed that its next dividend payment would not only be flat but would also only come 70% franked. ANZ shares are down 3.62% at the time of writing to $26.64 per share.

It’s the first time this century that ANZ’s dividends haven’t come with full franking credits attached, and investors are clearly not happy with the bank. But how much do franking credits really matter?

What are franking credits?

In Australia, when a company pays tax at the full rate of 30%, they then have the ability to pass on the taxed portion of their income to their shareholders as fully franked dividends. This gives the shareholders the ability to claim the tax already paid as a deduction (otherwise dividend income would be taxed twice), known as a franking credit.

If you take it one step further, back in the early 2000s it became legal to claim back the franking credits as a cash refund even if the recipient had no other income on which to claim the deduction (such as retirees in pension phase).

How does franking relate to dividend yields?

If you just take the dividend per share, ANZ shares offer a raw yield of 5.8% (we’ll use yesterday’s share price for a better idea), but an 8.29% yield including the benefits of full franking. Now that ANZ is only offering franking at 70%, the value of this yield is now lower – offering an approximate grossed-up yield of 7.34% (using my rough calculations).

This explains why the ANZ share price is getting walloped today (albeit with a bit of anger thrown in, I’d wager). ANX has effectively followed its banking brother National Australia Bank Ltd (ASX: NAB) and delivered a dividend cut in all but name.

Foolish takeaway

So yes, franking does matter when it comes to ASX dividend shares (as any invested retiree would tell you). Franking amplifies the effective yield shareholders can expect from their dividends, and ANZ has proven again today why franking matters.

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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank 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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