Dividends historically have been good to Aussie investors by rewarding them with their snip of the profits usually every 6 months. The truth is, there may be a better way other than dividend investing for you to actually get paid every month, up-front when you need it.
Dividends – what, why and when
A dividend is simply a cash payment from a company to which an investor holds shares in. They are often delivered in the form of more shares or in actual cash to order to reward shareholders for their loyalty. Paid usually every 6 months, dividends are a great income play for those who may need the cash flow.
Franking credits – the good news
In Australia, ASX companies instill a scheme called franking credits. A frank credit occurs when the company pays the tax on their dividends before they are issue to investors. This is done at the standard company tax rate (Approx. 30%). Meaning that if your tax bracket sits below this you can count your lucky stars – you are due for a tax credit. If you’re a high income earner and your marginal tax rate sits at the peak of 45%, you essentially only owe 15% to the tax office. As something unique to Australia, this is a major benefit to dividend investing.
Dividend yields – the bad news
Dividend yields have become the bug bear for many Australian investors in recent times. Yields that investors have been receiving through their dividends have typically been dropping dramatically. As Aussie companies have moved towards retaining their earnings for future company growth. As our interest rates have been cut and so too has the risk-free rate, the yields for investors are becoming increasingly thinner – a cash-flow crunch for investors is what host Andrew Baxter describes it as. Your typical go-to, high-yield dividend stocks like Telstra (ASX:TLS) for example are paying less than just 5% every 6 months.
When a company pays out, theoretically the price of the stock should drop by the dividend amount. A cash outflow for the company. This means that your hard-earned cash that has tied up with a company for months. On end may be dwindle away because of a low-yield dividend causing the stock price to fall dramatically. In some rare cases, companies can ‘hold their dividend’ meaning that their price drops by less than the dividend amount – a sure sign of an incredibly strong business with some serious momentum. However, seeing such strength can be like seeing Santa – incredibly rare.
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The options market – monthly income rather than semi-annual
If you are someone who receives household bills more than twice year than you may want to read this. Companies will only pay out every 6 months, so the question arises. What do you do for income in the interim as an investor? To our delight, host Andrew Baxter has spent 27+ years developing an options market strategy called “Cash Flow on Demand” (check the Australian Investment Education website for more info) whereby his investors can consistently receive between 1.5-2.5% income every month by selling call options. Such income is paid-upfront, in cash and whenever you want it – a no brainer for the modern day Aussie investor. Dividends