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Basics: Dividends – Money For Nothing

HOSTS Alec Renehan & Bryce Leske|4 February, 2018

There are two main ways to make money with stocks. The first is from the capital growth, that is selling it higher than you bought it for and making a profit. The second way is through taking a share of the company’s profit. As an investor you are a part owner of the company, so when they make a profit, some companies decide to share that profit among all their investors, and this is paid in what is known as a dividend. Who doesn’t like free money?! Dividends are a great form of income for investors and something you should consider next time you’re looking to invest. In this episode you will learn: • What a dividend is • How you can make money from dividends • What a dividend yield is • Which companies pay dividends and which don’t • Which companies are paying the highest dividend in Australia • What franking credits are and how they impact your tax return


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Bryce: [00:01:29] Equity Mates Episode 29 back again, excited to be here, as always, and joined with my equity buddy Ren. How are you going? [00:01:38][9.5]

Alec: [00:01:39] I'm very good Bryce. How are you? [00:01:40][1.4]

Bryce: [00:01:41] Good. Good. It's been a busy week up here in Sydney. And has it been done in Melbourne? [00:01:45][4.1]

Alec: [00:01:46] Yeah, it's been very good. Capped off by our podcast recently being named number three on our podcast to listen to by Spaceship's Sirpa. Yeah, very excited. Yeah, that was that was a good a good way to lead into the week. [00:02:01][15.9]

Bryce: [00:02:02] Certainly that was exciting news. The second episode for the year. So we thought we'd go back to basics this time and do a basics one on one which we haven't visited properly in a while. So we're going to be discussing all things to do with dividends and then we'll finish off with some stocks on our radar. I've got something to bring to the table and Ren you've got something to bring to the table, I'm sure. So, as always, let's get stuck in with what we've learnt for the week. Do you want to take it away? Ren. [00:02:31][29.1]

Alec: [00:02:31] So the one thing that I read in Equity Mates thought starters, always good to give that a quick plug was about Aruba and the fall of the Uber CEO, Travis Kalanick. Now, the reason I'm bringing this to the table is everybody was considered one of the hottest potential IPOs of twenty eighteen. Now, for those who aren't sure what an IPO is, it's an initial public offering. And it's when company first goes onto the public market and every day investors like you and I get a chance to buy some of their shares. So obviously everyone knows who they are and what they do. Far less people would know about the the pretty crazy behind the scenes story that led to Travis Kalanick basically being kicked out of the company that he started. So if people don't subscribe to thought status, they should definitely get on it because the story's pretty crazy. It involves Travis being his own worst enemy and just running the company a bit a bit like a dictator and then a half hot dictator. Half frat boy, I guess, is probably the best way to describe some of his behaviour. Yeah, it's [00:03:48][76.7]

Bryce: [00:03:48] a fascinating story. Just to take a quote from it, and this is quote, According to a person who was there, he literally got down on his hands and knees and began squirming on the floor. This is bad, he muttered. I'm terrible. [00:04:00][11.4]

Alec: [00:04:00] It's a good cliff-hanger. Why? Why was he on the floor? Why would you want. It is probably not going to be an IPO in twenty eighteen because of the change in leadership. The new CEO has admitted that they have a lot of making up to do. I guess they need to regain the public's trust. So probably going to look more like twenty nineteen or twenty twenty for the Uber IPO. It's definitely one to watch because there's probably no bigger name currently being talked about going on to the share market. [00:04:33][32.9]

Bryce: [00:04:34] Yeah. Where you invest. [00:04:35][1.1]

Alec: [00:04:36] No, I heard I can't remember where I heard it, but someone said that Uber is the world's biggest wealth distribution scheme. All it does is take money from wealthy investors and distribute it to everyday folk in subsidised transport because Uber lose money on every fare. So essentially these, you know, billionaire and millionaire investors are subsidising our cheaper taxi trips. Don't get me wrong, unbelievable growth story, unbelievable network effects. They are at the point where they have a lot of pricing power. But what we saw in twenty seventeen was Booba, and this is part of the story with Travis Kalanick is uber pissed off a lot of people. And Lyft over his rival in the United States, very quickly capitalised on that and took a lot of riders and drivers away from mobile. So they built an incredible business with a lot of users and a lot of drivers. But when it's just as easy for a driver to be an Uber driver and a driver, which when I was in the state, a lot of drivers are they they use both apps and it's just as easy for us as consumers to have both apps on our phone and to use one over the other. It's tough to to have a long lasting more if you if you're losing the network that you've built up. What what about you? You invest? [00:06:05][88.9]

Bryce: [00:06:05] I don't think so. I would tend to agree with everything you just said. I think that I mean, I use it, but that's the thing that's so true. It's so simple. It's one of those things that whilst competitors might be there. Yeah. But the answer would be no hubers burn. [00:06:18][12.8]

Alec: [00:06:19] Right. So the amount of money they're spending in a year, twenty seventeen four billion dollars. So we're losing four. They lost Folbigg. In twenty seventeen [00:06:29][10.2]

Bryce: [00:06:29] and someone's going to be paying for that, and that would be the investors, so I don't want to do that. [00:06:33][3.7]

Alec: [00:06:33] Yeah, but hey, what do we know? It's probably going to be the probably going to nail self-driving car, not an IPO, and then just be like the next Amazon. [00:06:45][11.3]

Bryce: [00:06:47] Probably. [00:06:47][0.0]

Alec: [00:06:49] All right. Anyway, what did you learn? [00:06:50][1.6]

Bryce: [00:06:51] Well, from opposed to CEOs, I. Well, tonight I found out that a cryptocurrency exchange in Korea or Japan, so I can't remember my head, but was hacked the other day and roughly six hundred and seventeen million dollars was stolen by hackers and thieves. And that was everyone's and cryptocurrency. So check your crypto wallets. Everyone could see you. But no, I'm not on offshore drilling. But a little question I want to say. So this is to do with CEOs and Ernst and Young decided that they would do some analysis on three hundred and seventy ISO errors. And for those that are on the initial coin offerings and they much like an IPO where a crypto or a digital firm offers up some of the Takins or cryptocurrency to buy. And so three hundred and seventy two analysed by Ernst and Young of that three hundred and seventy two sorry, that 372 was worth three point seven dollars billion total in raised capital. They wanted to know of that. How much was stolen by hackers. So what percentage or in dollar terms do you reckon was stolen by hackers or by the actual firms themselves doing that? And in most cases it was the firms and a fishing expedition. What do you think so [00:08:34][103.5]

Alec: [00:08:35] of the total of three point seven billion dollars? So one one percent of that is thirty seven million dollars. Yeah. Still so much money. All right. I'll say three percent. About one hundred million. Three percent. [00:08:51][16.1]

Bryce: [00:08:52] One hundred million dollars. So three point seven billion was Bryce over three hundred and seventy axios seventy two CEOs. And just on four hundred million. This is so, so ten, ten or so fishing was the most widely used hacking technique for years, with hackers stealing up to one point five million in proceeds per month. [00:09:13][20.7]

Alec: [00:09:14] According to how much per month. [00:09:15][1.4]

Bryce: [00:09:15] One point five million. [00:09:16][0.8]

Alec: [00:09:17] We should come. [00:09:17][0.4]

Bryce: [00:09:18] OK, so so less than twenty five percent of last year's breaks. That target late last year in twenty seventeen, whereas midway through twenty seventeen, 90 percent were hitting targets. So there's a lot less ICRA happening at the moment. But yeah, I found that a lot of it was just dodgy behaviour from Dollars that were actually conducting more. So. [00:09:48][30.1]

Alec: [00:09:48] So Holloran go back to that. So you said at the end of last year 90 percent of those CEOs were fully subscribed. So no junior in June last year it was ninety percent. So that means if your company is doing it on and they want one hundred million dollars or whatever they were asking for 90 percent of the time, don't get that off. And then what was the other one? It was twenty, [00:10:09][20.8]

Bryce: [00:10:10] twenty five percent by November. [00:10:11][1.4]

Alec: [00:10:12] So in five months it dropped from ninety percent to twenty five percent. Yeah. Well OK, so what does it say what the reason for that is or does anyone know what the reason for that is. [00:10:22][10.4]

Bryce: [00:10:23] No, I think they're just indicating that it was losing steam, people were losing confidence and also transparency in the Ostergaard process, I guess. And as more came to market, they became less credible. In April, they had less volume was there to drive people to actually subscribing. [00:10:45][22.2]

Alec: [00:10:46] Yeah, you could say that. Or at the peak of the bubble, all the good ideas were exhausted very quickly or a lot of the immediately accessible good ideas. What? And so then the quality of the article is titled All or or you could jump kind of like it could be that the amount of investors super into crypto and willing to invest in these ICOS, that it got posta like a saturation point. And by October, November, most of the those investors were fully invested in early. Yeah, it's interesting, but does that mean we've we've past paid crypto. [00:11:24][38.0]

Bryce: [00:11:25] That's what we thought it was. Well, we've passed. That's what it's articles alluded to, but we're not touched upon because we've done this three or four years ago as well, because it's 1969, obviously, and then it kills off and then something else happens. Yeah, watch this space. [00:11:42][17.9]

Alec: [00:11:43] But even even if ICAO's tail off, more and more companies are using blocked. I know I was writing about Wal-Mart is doing all these trials with block chain. So even if, you know, the the crazy coin's like banana quoin and whatever else is out there, stop being used. I think the technology is definitely catching on. [00:12:04][20.4]

Bryce: [00:12:04] So money for nothing that rings a. [00:12:07][2.5]

Alec: [00:12:08] Your favourite song, I think. [00:12:08][0.8]

Bryce: [00:12:10] Correct. [00:12:10][0.0]

Alec: [00:12:12] God, it's damn close. [00:12:16][4.3]

Bryce: [00:12:18] I'm surprised you actually motivated money for nothing. OK, I know not the Dire Straits song, but also what many investors feel when they talk about dividends. So let's go into a bit of a basics one on one. We haven't as I said, it's not a on the basics what I want for a while now. And we thought it'd be a good opportunity to go back to our roots because we understand that a lot of us get a lot out of this. And obviously, so do we think it's a good opportunity for us to refresh on a number of important things to do the basics of investing. So we thought that would be a great opportunity to talk about dividends, what they are and more importantly, how they can help contribute to your investing portfolio and also the way that you think about distributing your capital when it comes to investing in stocks. If you want to jump into this Ren Investing 101, why [00:13:14][55.9]

Alec: [00:13:14] do we invest to make money? And there are two ways that we can make money from stocks. The main one that everyone talks about is the share price going up. So you buy a stock of Amazon and it goes from one hundred bucks to a thousand bucks. You've made nine hundred dollars. Great. But there's another way that you can make money from stocks, and this is what we're talking about today, and it's dividend and that dividend income distributed to shareholders out of the net profits from a publicly listed company. [00:13:48][33.8]

Bryce: [00:13:48] Yeah. So it's a cash payment from the earnings to those shareholders. And it's usually paid anywhere between annually to every six months, three quarters of bank account. [00:14:05][17.2]

Alec: [00:14:06] The way to conceptualise this is when we talk about buying a share. We always talk about when you become a part owner of that company. And so as the company does, whatever it does sells stuff, office services, whatever it does, it it makes money and it makes profit on whatever money it's making. And then you as the business owner are entitled to some of that profit. So let's say a business makes a million dollars in profit, decides to keep five hundred thousand of it, fund its operations, and then there's a five hundred thousand that it decides to give to the owners of the business. If you own one of the five hundred thousand shares out there, then you will be paid a one dollar dividend as your share of the the profits of the company. Yeah. [00:14:54][47.3]

Bryce: [00:14:54] So historically, going back into the 20th century, dividend stocks were actually a major focus for investors because of this reason, because they generate a consistent return income and more often than not, as people got closer to retirement age, these are the sorts of stocks, often blue chip stocks that super funds and the mom and dad look to buy because they're not necessarily off to the capital graph that you talked about at the stock Ren, which is one way to buy stocks, but they're more looking for the income that that stock provides. And so obviously, the more shares you buy, as you know your partner, the more shares in the company, the more you get tied up. So it's interesting to note that, you know, times have changed and as everything has a business cycle and an economic cycle and the way that investors invest all sorts of things. And so we're now saying, especially in the Australian market over the last 12, especially six months, a big push towards small, ordinary companies, because as you said at the start, Ren, they're off to capital growth, no longer companies that are paying out dividends, because in times like this, where valuations and stocks of companies they're looking for, that's from the capital growth to sort of increase their wealth rather than relying solely on dividends. [00:16:21][87.1]

Alec: [00:16:22] So maybe maybe let's explain that and unpack that a bit further. So the business. The cycle is, you know, you have a recession and investors flee to safer assets. So for stocks and companies, that's generally the the blue chip, the super safe companies, you know, your banks, you know, even things like your Telstra infrastructure companies like Transurban and Sydney Airport, just just companies that are very safe, very secure, make consistent profits every year. And they generally the companies that pay a high dividend. But then as the business cycle changes and you go out of a recession and into a growth phase of the business cycle, what investors start to see is that smaller companies seem to grow a lot. And then there's a little bit of flomo, I guess, and investors leave the the safe dividend paying companies towards the more faster growing companies. And then as the market gets hotter and hotter and hotter and hotter and grows and grows, which is the phase we're in now. And what we've been in for, I guess the last year, we've there's been a very strong growth phase and then eventually the market gets too hot or something happens and then market corrects and everyone freaks out and goes back to the super safe, dividend paying stocks. [00:17:44][81.9]

Bryce: [00:17:44] What I want to point out there as well, I think we mentioned that, but not all companies pay a dividend. And you will find that the companies that are usually in their own growth phase of the business cycle, so they're a young company, is that rather than paying out their profit to their shareholders, they are withholding that and reinvesting it back into the business so that they can grow at a much quicker right. And use that capital more effectively than you can put out to their shareholders. Now, obviously, shareholders are fully aware of the fact that this is the case when there be more than happy for the company to do so because they will be wanting the company to grow and give them some capital gains. And obviously, at some point they will expect to see the money that they have invested be returned in the form of dividends. So to give you an example, Amazon, which you would probably be a bit surprised still to this day, doesn't pay a dividend. And I'm not sure about Facebook. I'm pretty sure. I don't think so. You would think that both of them are in positions to certainly pay dividends because they have such high earnings, but they still firmly believe that they're in that tech sector and they're still in there, I guess in the growth phase of their business. They don't feel that they have hit maturity yet. And so they haven't been paying shareholders dividends, although their shareholders have been rewarded handsomely with capital growth. So you do hear some calls from investors for them to stop paying dividends, but they're not. So those are probably two more outlying examples. But a lot of the smaller companies don't pay dividends. The ones that, as I said, you know, Sydney Airport, Woolworths and BHP, those that are there, they're not going to blow up. They're not going to fail. They're the ones rewarding shareholders with dividends. [00:19:32][108.0]

Alec: [00:21:25] And we should also talk. About Australia versus the rest of the world, I guess, because Australian investors love dividend, that the average of the S&P 500, so that's the 500 biggest companies publicly traded in America. The average dividend is two percent so far. And the the dividend yield is calculated is dividend divided by share price as a percentage. So if my share price is one hundred dollars and I pay a dividend of two dollars per share, my dividend yield is two percent. So in America, the average of the big companies over there is two per cent. In Australia, the top 200 companies. In Australia, the average is four point seven per cent without franking credits, which is something we'll touch on later. But yeah, so it's more than double America, the amount that Australian companies pay in dividend, which which is great for Australian investors, you know, it means that every half year you can expect a decent chunk of change coming in from the big companies that you own. But what it means is every dollar that you use as a company payout to your shareholders is a dollar you can't invest in getting becoming more efficient in your operations, buying more product, employing more people, expand into new markets or expanding your product range. There's an opportunity cost and there's definitely there's definitely the fair share of criticism. Australian companies. And there's also a fair share of criticism levelled at Australian investors for being too demanding with the amount of dividends they get. Because what you'll find is once a company is consistent, consistently paying a certain percentage out as a dividend, investors get very what's the word, demanding, I guess the top. [00:23:22][116.8]

Bryce: [00:23:23] Yeah, tax [00:23:23][0.3]

Alec: [00:23:24] falls. They they're not very happy. So that's maybe part of the reason why Telstra is a great example of this at the moment. So Telstra is consistently one of the highest dividend payers in Australia. And I mean, it makes sense. For a long time, it was essentially a monopoly in telecommunications. So it was making some money. It had no competition. So it could just pay its investors high dividends every half year. But what's happened is that competition has ramped up both in with like Optus, Vodafone and all of that in the telco space. But then now with NBN coming in on the broadband side of it, Telstra's really struggling for an identity and it's struggling to compete. But it's paying out, yeah, very high percentage of its profits compared to its competitors as a dividend. And it means that you can't invest that that money in developing new technology or becoming more competitive or expanding to Asian markets or whatever else they might want to do. [00:24:28][63.5]

Bryce: [00:24:29] And the issue was that they decided to cut their dividend payment significantly, last reporting that they did, because they realised that they need to use that money for better purposes, as you said, at least positioning themselves better against the competition, because so many people have come to rely on Telstra as these high paying dividend stock whilst they drop their dividend to still what would be a reasonable return on their share price to absolutely slammed because investors were so attached to the idea that they were once gave X amount and now they're getting why they sold off quite drastically, which is a bit, but just goes to show their attachment, attachment to the sort of stuff. [00:25:14][45.3]

Alec: [00:25:14] We just were too fussy, I think, in Australia. [00:25:16][1.9]

Bryce: [00:25:18] So you mentioned you there and it's a percentage, but it's it's good to note that you can find what the company is going to pay dividends or at least what they pay previously considered historically could reasonably judgement as to what it's going to be going forward, just like you would find any other financial information on the stock through the ASX or through Google Finance. It's always it's called the Deep Dive dividend per share and it will give it to you as a dollar value [00:25:49][31.1]

Alec: [00:25:49] that the really good thing is companies actually announce their dividend. And then if you if you want to get that dividend, you have an opportunity to buy the stock. And then you will see in on websites, on companies reports, there's a it's an ex-dividend date is what it will be liable does. And that's like the Cut-Off date. So if you're a shareholder before that date, then you get the dividend. So the Telstra says they're going to pay a crazy one off dividend of one hundred dollars a share. You can check what the ex-dividend date is because, I mean, maybe for something crazy like that, they will back. To the when the announcement was before the announcement, but a lot of times you have an opportunity to buy the share after the dividend has been announced. So that's always something to keep an eye on [00:26:37][47.8]

Bryce: [00:26:38] and start to point two points on that. You often find that once the ex-dividend date occurs and takes over, you'll actually see the price of that share drop in value. And that's because the shares you just had to take off the cost of the dividend. So, for example, I'm pretty sure Microsoft, a couple of years ago, its dividend was about three dollars and it was trading around twenty nine. So that was trading around twenty nine point sixty four dollars to twenty seven. So that's something to keep in mind. If you say your stock dropped significantly or not so significantly on ex-dividend date, and that's that's why I don't freak out and probably bounce back the next day. The investors were just getting a good price. So that's one thing to note. And second thing to note is that your dividend yield actually changes based on the price of the stock. Obviously, as you said, your view is divided by the dividend, divided by the share price as a percentage. And so obviously, if the share price goes up or down, then that percentage is going to change. So I don't think that if one day you say the dividend, that four percent, that that's what it's going to be when you get paid out and according to your calculations or your view or whatever. [00:27:54][76.6]

Bryce: [00:27:55] So just keep that in mind [00:27:58][3.3]

Bryce: [00:27:58] that your yield will change based on the share price. But the actual dividend payment in dollar terms that the company said shouldn't change unless they announce it. I think that would be great. [00:28:10][11.5]

Alec: [00:28:10] Yeah, definitely. And it's probably also worth thinking that the yield is based on the current price, but your personal yield is actually based on the price that you paid. So if you bought a share at ten dollars and then it went on a crazy run and it's now one hundred dollars and then it's paying 10 dollars a share as a dividend, not to be awesome. Yeah, you make money by then, you know, you're the company's dividend yield is 10 percent because it's paying a dividend of ten dollars and its share price is one hundred dollars. But you bought the share at ten dollars. So your dividend yield is actually. [00:28:50][40.5]

Bryce: [00:28:51] It's just that, right? [00:28:53][1.9]

Alec: [00:28:55] Yeah. So you get some investors were getting in that situation. A classic example is people say Warren Buffett will never sell Coca-Cola. Well, firstly because of the cap gains, but then also because, you know what, he bought it up and the dividend he's getting, his yield is great. Yeah. Yeah. [00:29:14][19.0]

Bryce: [00:29:15] So quick question. What do you do with your dividends when you get into a bank account or do you get them reinvested? [00:29:23][7.4]

Alec: [00:29:23] So that's probably something. Yeah. So not all companies offer reinvestment or what is reinvestment, OK. So when you get paid your dividend, you can either just get it in cash and put it in your bank account. Sometimes I send you a check, which is really annoying because when you go to a bank and it's [00:29:45][21.5]

Bryce: [00:29:46] like 30 bucks as well. [00:29:47][1.2]

Alec: [00:29:47] Yeah, I think I have one sitting around here. I say it occasionally, but I think it's like three dollars or something. That's really I think it's even less risky. I didn't know what I thought. So you so you can get it in cash or your other option is some companies let you put that dividend back into more stock so you it can be reinvested into shares in the company and generally they'll give you a lower share price than what's on the open market. So what's on the share market at that moment? So it's a good opportunity. If you really like the company that you're invested in, it's a good opportunity to get a bit more stock in that company [00:30:32][44.3]

Bryce: [00:30:32] and strongly recommend. Well, I think it's a really good idea to do that at this stage, especially because, you know, the money that you receive dividends, if you're relying on that to actually live and you should be invested in the first place. And we're not at retirement age where the income and the pensions is gone. So reinvesting is just like another form of compound interest. And as we've said many times on this show, compound interest is king. And before you know it, if you're reinvesting every six months when you get that dividend and you don't even know that it happens, you just get a letter or an email saying that this is how he says the company has fought on your behalf with the dividends that you were entitled to before. You know, you would be adding more and more and more shares to the portfolio and that, in turn generate more and more dividends. It's a really good opportunity and way to grow your long term without really having to do it. You just click the rain button. [00:31:35][62.9]

Alec: [00:31:36] So, yeah, I, I agree, but only if it's a company that you like. [00:31:41][4.7]

Bryce: [00:31:41] Of course. But can I add to that. Yeah. It's not like if it's not a company like it then ensure that the money that you are paying dividends somehow ends up back in stocks. [00:31:52][11.2]

Alec: [00:31:53] Yeah, that's what I was going to say. So yeah. So even broader than that, it may not be that you might like the company, but you might be new to investing and you might want to diversify or you might have another really good idea that you want some money for. I think the general rule is anything you get paid in dividends, reinvest in some way. The easiest way to reinvest it is to automatically get your dividends reinvested into the company. Don't spend it on a night out or stupid thing. Yeah, because. Yeah. [00:32:30][37.4]

Bryce: [00:32:31] Like you're going to regret it. It's just a lost opportunity. [00:32:33][2.4]

Alec: [00:32:34] Yeah. Like the money that you put into the share market. It should be like setting forget money. It should be money that you don't touch. And in the same way that when you make a capital gain on a share, when the share goes up in price, you don't sell it and take the profit and spend it. Similarly, when you get a dividend, you shouldn't spend it. You should find a way to put it back into the market or put it back into a market, whatever that is, [00:32:59][24.8]

Bryce: [00:33:00] especially when you go to the school, like the companies that give you the money, they're not guaranteeing at the bottom of the profits. So use it wisely. [00:33:11][11.0]

Alec: [00:33:11] Yeah, definitely. All right. We we should we should tackle franking credits now. Okay. [00:33:17][5.5]

Bryce: [00:33:18] This is Frankenstein, who I'm [00:33:19][1.9]

Alec: [00:33:20] hoping hoping everyone has followed us up to now, because from here on out, you're probably not going on. Bryce and I were trying to figure out something to do with franking credits before we started recording and we got ourselves confused. So, yeah, leave it out. All right. Let's let's start very, very high level. [00:33:43][23.2]

Bryce: [00:33:44] Yeah, let's start. [00:33:44][0.6]

Alec: [00:33:45] OK, yeah. So so franking credits is something that's kind of unique to Australia and only Australia and New Zealand and Malta have this system and then a couple of those four countries that have like a partial system. But let's not even worry about that now. So, OK, so conceptually, when you're a company and you make a profit, you pay a tax on that profit and then the company pays a tax on that profit. Yeah, but then when the company distributes that money to its shareholders, the shareholders, when they get their dividend, they then a tax on that dividend. [00:34:24][38.4]

Bryce: [00:34:25] That's double taxation. [00:34:26][0.5]

Alec: [00:34:26] Yeah, that's not very good is it. That's unfair. Yeah. So the Australian government, in all of its kindness and wisdom, has come up with a system to ensure that investors don't get double double taxed, don't suffer double taxation. [00:34:44][18.1]

Bryce: [00:34:45] Yeah, it's not that's not that. [00:34:47][1.7]

Alec: [00:34:47] Yeah. Thanks, man. [00:34:48][0.8]

Bryce: [00:34:50] So how is that done? [00:34:51][1.3]

Alec: [00:34:52] So when you get paid a dividend, you will get a franking credit with that dividend. And that franking credit is essentially a credit for the tax that has been paid on that dividend. Yeah, and then the government, when you do your taxes at the end of the year, you claim that franking credit back to the government and the government will then pay you out what you shouldn't have lost in tax. So so I think of it like if you're if you work a wage job and you get taxed on every on every paycheque, and then at the end of the year, you claim some of that tax back from the government. It's similar not just for your investment, [00:35:35][43.1]

Bryce: [00:35:36] it's a tax to the national company. It's not all companies pay full franking credits. That's obviously 100 percent franking. Some some companies don't pay for all, especially during that sort of things, as you said, Ren. But at a very high level. Yeah, it's it's tax part of it, I guess, that allows the investor at the end of the day to not get some tax on them. [00:36:06][30.3]

Alec: [00:36:07] Yeah. Tell me if it's muddying the waters. But to give a very high level example, if you're if you own a company, it makes one hundred dollars in profit. It wants to pay it. It gets taxed thirty percent. So seventy dollars left over. Yeah. It gives you that. Seventy dollars and then your tax on it. So then you were given a franking credit for that 30 Dollars, so at the end of the year you go to the government and you say, hey, this company was already taxed 30 Dollars and he's the franking credits approves it. And then I was also to give me back. So give me back whatever the difference is. So I'm only taxed at my tax rate. Yeah. And then the government is like, oh, dude, is the money good investing. Yeah. [00:36:55][48.2]

Bryce: [00:36:55] Well, Bryce one. I guess what [00:37:00][5.0]

Bryce: [00:37:01] the question should be though, at the end of the end of this discussion on Frankenstein, it's. Yeah. Does it impact the way that we invest at all. Sort of impact how the impact I mean [00:37:14][13.4]

Alec: [00:37:15] if you're asking am I out there hunting for franking credits. No. Yeah. Yeah. [00:37:20][5.0]

Bryce: [00:37:21] So this is probably more broadly looked at by, as we said at the start of the show, the superannuation funds and the mums and dads, the so-called super funds, because they're all about as little tax as possible and maximising returns and companies that offer more advantageous to them than they are to the likes of you. And I aren't going to be jumping to the next tax bracket from thirty dollar check [00:37:50][29.2]

Alec: [00:37:51] will say, well, Equity Mates the guy. [00:37:54][2.2]

Bryce: [00:37:56] So I think, [00:37:56][0.3]

Bryce: [00:37:56] I think what I was trying to read or write at the end of that discussion is that whilst it might seem a bit confusing, that it's not really much of a huge concern and it shouldn't be a huge concern. It's something that you try and go into, as you said, hot damn credit companies, because at the end of the day, you should be looking at that stuff. [00:38:19][23.1]

Alec: [00:38:20] Yeah, 100 percent. Yeah. [00:38:21][1.0]

Bryce: [00:38:22] Yeah. Good explanation. [00:38:23][0.6]

Alec: [00:38:23] All right. I guess that confused anyone. Don't don't worry about don't worry about what it is, just record it. And at the end of the year put it in your tax return and don't worry about what it means and why you have it. But just know that it's good to you get money back if you put it in your tax return. [00:38:42][18.1]

Bryce: [00:38:42] Yeah, well, these days you probably don't need not to do it. I mean, your tax numbers, you just provide us your profile so the government picks it all up in the way you go. Yeah, that's true. Yeah. Okay. Ren well, is there anything else you want to add to dividends? I have a couple of dividend stocks of over my head, actually almost all of them do that, so. Yeah, well I think about it. [00:39:08][26.1]

Alec: [00:39:08] I wanted to ask you a question to start our little stock chart at the end of this episode. Yeah. Which was in Australia. What company has the highest dividend yield? [00:39:22][13.5]

Bryce: [00:39:23] So you're asking me what company am I going to get the biggest surprise off? Yeah, and this is with no filter on your search. [00:39:34][11.8]

Alec: [00:39:36] No filter other than Australia [00:39:38][1.7]

Bryce: [00:39:39] might filter other than Australia must pay a dividend. I'm going to go with Jim. That education. [00:39:49][10.2]

Alec: [00:39:50] No, what is it? Well, hold on. Why did you choose that? [00:39:55][5.3]

Bryce: [00:39:56] Just because I didn't want to float supplies and saw it on on my list, so. [00:40:01][4.5]

Alec: [00:40:01] Right. OK, OK. Any other guesses. No. OK, so that's one of the highest dividend paying stocks in Australia right now is retail food. [00:40:14][12.5]

Bryce: [00:40:14] Oh, that's right, yeah. So what are they paying? [00:40:17][2.8]

Alec: [00:40:18] So they're yielding their share prices to Dollars floor and they're yielding twenty one per cent. So they would be paying a forty percent dividend on a Dollars share price. [00:40:30][12.4]

Bryce: [00:40:31] Wow. So you're going to get almost twenty five per cent of your money back. Equity Mates dividend [00:40:36][4.9]

Alec: [00:40:36] payment. 20 per cent. [00:40:37][0.9]

Bryce: [00:40:37] Yeah, 20 percent. Almost twenty percent. So that's a pretty good return on money if you think about the equivalent of putting it into a bank account. But the reason is because retail food group has actually been slammed and their share price has significantly fallen over the last, what, six months or so? [00:40:55][18.3]

Alec: [00:40:56] Yeah, the down the down sixty nine percent for the year they bothered, but in December they were for those forty and now they're trading at two o'clock. [00:41:06][10.5]

Bryce: [00:41:07] So on that order. [00:41:08][0.8]

Alec: [00:41:08] Fifty percent. Yeah. So when you think about it, if their dividend was 40 cents when they were trading in the mid forties, they're yielding eight to eight percent appropriately. So they're there. The yield is it's high, but it's a lot more in line with with the norm. But now that the share price has tanked, the yield is a lot higher. [00:41:31][22.9]

Bryce: [00:41:32] That's a really good lesson there, I guess, showing that if you were to search and kill yourself based on dividend yield would be like, oh, what's the dividend yield on that? It's important to think about why that might be why it is. And in this case, it's because the share itself is not favourable with investors at the moment. So it might have a fantastic dividend yield, but you're quite potentially going to lose another 50 percent of your money if it continues trading away at the moment. So keep that in mind when looking at you as well, Heidi. We had to do it. Doesn't always make a good point. [00:42:05][33.2]

Alec: [00:42:05] Yeah, definitely. All right. So that's why I'm. So you didn't get the answer. Right. But that's okay. Wait, forgive me. Well, what what are some of the shares that you're looking at? Any dividend payers? [00:42:21][15.8]

Bryce: [00:42:23] No particular dividend payouts. I had also done a similar scam to you. You beat me to it. Mine was based on companies with a market capitalisation of over Dollars because I guess [00:42:36][13.3]

Alec: [00:42:37] for all I knew, it was market capitalisation. [00:42:39][2.1]

Bryce: [00:42:40] Market capitalisation is the value of the company at its current share price times the number of shares that are available. So the value on the stock exchange. And so I did one that was with the market, over a billion dollars dividend yield of over five percent, because as we were talking before, the big companies that pay dividends, lots of what we go. So the number one stock that came up, interestingly, is Fortescue Metals Group and gave Twiggy Forrest a and I got a course of twelve point six percent, just like retail food group. They've also taken a pretty heavy hit on their share price over the last couple of months. So that's probably a major contributor to them having the gross yield at what it is, their pay, 45 cents for every share. So far, though, it's not at the moment. [00:43:38][57.2]

Alec: [00:43:39] So there you go. [00:43:40][1.2]

Bryce: [00:43:41] Yeah. So, I mean, in terms in terms of investing, either you get the dividends. It's a bonus for me. I do pay dividends and I always request my dividends as one stock that I'm not dividends. But that goes straight into an account that is for stocks and bonds that hits a certain level of money. I would just put that back into some of the stocks that I'm stupid. So I don't have any stocks on my radar. Do you have any dividend stocks? [00:44:11][29.8]

Alec: [00:44:11] So there were there were two that I was looking at for a while then known as Bond Proxies, now bonds. And I'm sure we'll do an episode on this at some point. But when you buy a bond, you get paid a an amount every every year or every half year. And then you get all your money back at the end when the bond matures. And these two companies are called bond proxies because they have similar characteristics to bonds, they pay a consistent amount out every half year. So the two companies are Sydney Airport imaginatively named because they run the Sydney Airport. And then the other one is Transurban, and they run most toll roads in Australia. If you've driven on that corner and get one and two and one of them, there's one in Melbourne, I live like really close to it. I can't remember its name on the ride anyway. Tolerates, you know, you've got your tag in your car. You're paying this company basically. Um, so they're both super consistent because airports are very consistent businesses, same as toll roads, you know, very consistent number, a consistent traffic or consistent air traffic. You have a lot of ability to set the price. So obviously, Sydney Airport is the only airport in Sydney. So if you want to fly from Sydney or fly into Sydney, you are a price taker. And Sydney Airport or the price Mecca. Similarly, Transurban, if you want to drive in a major city in Sydney and you want to get somewhere quickly, you will pay whatever the toll is. So if inflation goes up, if the cost of labour goes up, if the cost of fuel or whatever they need to run, that business goes up, they can increase their price. So so because they they can set their price like that, it means that had very consistent revenue, quite consistent profit and a very consistent dividend. Both of the companies pay about five percent dividend. So you buy it and you just whatever that. I'll just pay five percent a year, which is which is no better than a bank. No, nothing to complain about. Yeah, I know. [00:46:34][142.3]

Bryce: [00:46:34] And that's what a lot of people do. As we said many times. And so they often don't buy with the consideration of making a capital gains on it. They'll just stick their money in there and take five percent and use that for other things. So, yeah, [00:46:50][15.7]

Alec: [00:46:51] that's what I said. I was looking at them. The reason I didn't buy them, they are both have a lot of debt and they are quite expensive. So Transurban is trading at a price to earnings ratio of one hundred. Well, yeah, and it has thirteen point seven billion dollars in debt and it's making two point seven billion dollars in revenue a year. So seriously highly geared and you're paying a lot for its earnings. But the reason you're paying a lot is because everyone just throws in transit and into that portfolio because it's just a consistent dividend payout side. Similarly, Sydney Airport, 40 of forty five price earnings ratio and similarly very, very high levels of debt. So I didn't buy either of them, but I figured because we're talking dividends, good time to them to bring them up. [00:47:44][53.8]

Bryce: [00:47:45] Yeah, well, Cygwin with Transurban, I guess. I'm not sure if you're aware, but we're coming in to that time of year, again, February, where we start getting interim reports come through from all of our beloved companies and it picks up. And I think if this started with the Fed and then we're going to go all the way back to the sort of reports and this is that funny kind of you, if expectations met or exceeded, then we will often see the share price spike. And if expectations are used, then we'll often see their share prices fall. So Transurban is actually going to be reporting on the 13th of February. And it'll be interesting to see what their earnings growth is across all of the roads and that sort of stuff. But I just thought, as always, we go through the list and see which companies are going to perform well and just the likes of Domino's on the 14th. The federal is one to watch reporting time because they are from Lockleys. Interestingly, I'm very keen to see how it goes. Yeah, they are on the 14th of February when [00:48:58][72.9]

Alec: [00:48:58] signing Valentine's Day. They are not [00:49:01][2.8]

Bryce: [00:49:03] so interesting to say that we both and not although use my exposure to them. Who else do you want to say? Ren Bellamy's will be an interesting one to say. They're an all time high at the moment. Macquarie Atlas Roads, when we were talking about earlier Ren they always perform. I'm interested to see how they perform. They're also very Transurban. They're on the twenty eighth of February, Macquarie hitting almost one hundred dollars again. So it's that time of year again. Ren. Yeah. Your got excited. My favourite time of year. So anyway let's, let's wrap it up. It was a good chance for us to refresh on dividends because clearly we had some things to learn as well and refresh on. And it's always good to go back over these things for our learning and development going forward because it's easy to forget the importance of these sorts of things. So I hope everyone got something out of that. If it was difficult to understand, then that's Ren fault. [00:50:02][59.2]

Alec: [00:50:06] Yeah, I'll call it that. [00:50:07][0.6]

Bryce: [00:50:10] But yeah. Look, thanks for listening and looking forward to seeing you being with you again. Next episode [00:50:17][7.0]

Speaker 7: [00:50:18] Equity Mates. And the cable appearing in this programme may have positions in the as mentioned, this is general advice for me. Please speak to a financial professional to understand how they pertain to your individual situation. [00:50:18][0.0]

[2719.3]

More About

Meet your hosts

  • Alec Renehan

    Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

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