There is a risk SMSFs will switch from highly franked stocks into highly expensive stocks in response to Labor’s excess dividend imputation credits proposal and if they are failing to receive appropriate advice.
DNR Capital Australian equities income portfolio manager Scott Kelly told selfmanagedsuper the ALP’s policy proposal to scrap cash refunds for excess imputation credits seems to penalise investors for owning shares relative to other potential investments.
But Kelly cautioned against abandoning investment in Australian companies that offer franked dividends, saying that while the policy diminishes the value of franking, it does not negate it as an avenue for reducing the double taxation of dividends.
“Franking still has a benefit. It’s just if you are not paying enough tax, you just don’t get that benefit,” he said.
“So for someone who’s in a 0 per cent tax-paying environment, then it’s an issue for them; but it’s not an issue for other people who have income that they can set it against.”
He said the DNR Capital invests in companies such as Suncorp, Caltex and Wesfarmers, which have franking credits. They would offer those dividends to shareholders before the policy changes.
“So we’re really just trying to make the point that franking still has value. It’s just that value is being transferred to different investors,” he said.
SMSF investors should broaden their exposure to Australian equities beyond the banks given the risks of an overheated property market, leveraged consumers, cyclically low bad debts and the banking royal commission, and Telstra, given the Australian telecommunication industry is facing a number of structural changes and a changing technological landscape that requires ongoing investment.
Kelly said DNR Capital is investing in companies like Woolworths, which it said has delivered a good level of dividends, indicated its focus on supermarkets with the selling of Masters, while its chief executive had set key performance indicators that re-emphasised the company’s focus on supermarkets.
He also said while there was an argument to invest in international equities, it would provide returns in the short-term only, particularly given the long running bull market in the United States.
Recent volatility and the US Fed raising rates could halt the bull market, and indicate a looming recession at some point, he said.
“That could happen very quickly, but it could not happen at all. Longer term, Australia looks more attractive in terms of valuations,” he said.
“But short term, it will be difficult for it to perform relative to the offshore markets.”
