ASX franking credits are one of the best things about investing in ASX dividend shares.
Australian companies that pay income tax generate refundable franking credits, which can be attached to dividends paid to shareholders. Australian tax residents can then benefit from the payments because franking credits boost shareholders' tax positions by lowering the taxes owed or creating a tax refund.
For Australians looking to boost their passive income, ASX shares that pay dividends with franking credits could be attractive.
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How much can franking credits help?
Franking credits also give Aussie tax residents a boost to their dividend yields, although the after-tax benefit will depend on the individual's tax rate.
For example, if a $70 fully franked dividend is the only taxable income that someone received in the year, they would be in the 0% tax bracket. The $70 dividend is a cash payment, and there would be $30 of franking credits, resulting in $100 of total taxable income.
That person would get the $70 cash dividend and a full $30 tax refund when they do their tax return. That's extra money that investors in other countries simply don't receive. Lucky us!
For people in the 19% tax bracket, only some of the franking credits would be refunded, because a portion would be used to pay the taxes charged on the dividend and franking credits. Franking credits count as taxable income as well.
For taxpayers in a high tax bracket, the franking credits are useful because they reduce the amount of taxes owed. For high-income earners, I'd suggest that high-yield ASX dividend shares are less effective because a significant portion of the annual return is lost to tax.
How to maximise the passive income
To get more ASX franking credits, we need to look at businesses that have higher dividend yields. Assuming the dividends are fully franked, then the higher the cash yield, the more franking credits Aussies will get.
I'll stress that it's important not just to buy a business for its dividend yield. Dividends can be reduced, or cut entirely. The business valuation and earnings outlook need to make sense for any share we're buying.
For example, New Hope Corporation Limited (ASX: NHC) shares are projected to pay an annual dividend per share of 73 cents in FY23 according to Commsec. This translates to a cash yield of 15% and a grossed-up dividend yield of 21.9%, including the franking credits.
However, the coal miner's annual dividend per share could then fall to 36.5 cents per share. This would represent a grossed-up dividend yield of 11% — essentially a halving of the dividend. I'm not sure about the long-term outlook for coal miners as the world decarbonises, though they are making strong profits now.
ASX dividend shares that could pay sustainable passive income
No dividend (or ASX franking credit) is guaranteed, and the current economic situation is increasing uncertainty.
If I were to look at some names that have relatively high yields today and could keep maintaining the payment or even growing the dividend, according to Commsec, here are some examples:
ASX retail share Shaver Shop Group Ltd (ASX: SSG) has a plan to grow its dividend and could pay a grossed-up dividend yield of 15% in FY24.
Private health insurer Medibank Private Ltd (ASX: MPL) could pay a grossed-up dividend yield of 6.6% in FY24.
Bunnings and Kmart owner Wesfarmers Ltd (ASX: WES) could pay a grossed-up dividend yield of 5.7% in FY24.
Supermarket business Coles Group Ltd (ASX: COL) might pay a grossed-up dividend yield of 5.4% in FY24.
Fund manager investor Pacific Current Group Ltd (ASX: PAC) could pay a grossed-up dividend yield of 10% in FY24.
