Fully Franked Dividend
A dividend where the company has paid the full company tax rate on the underlying profits, with maximum franking credits attached.
A fully franked dividend is one where the company has paid company tax on the full amount of the profits being distributed, and the maximum franking credits are attached to the dividend. For a company paying the 30% tax rate, a fully franked dividend of $70 carries $30 in franking credits (representing the $30 of company tax paid on the $100 of pre-tax profit).
Most large Australian companies (banks, miners, telcos, retailers) pay fully franked dividends because they generate most of their profits in Australia and pay Australian company tax. This makes Australian shares particularly attractive for local investors compared to foreign shares, which carry no franking credits. The franking credit benefit is most pronounced for low-income earners and super funds, who may receive net refunds of excess credits.
When comparing investment returns between franked and unfranked (or foreign) dividends, you should consider the grossed-up yield. For example, a 4% dividend yield that is fully franked at the 30% company tax rate has a grossed-up yield of 5.71% (4% ÷ 0.7). The grossed-up yield represents the true pre-tax return on the company's earnings, and is a fairer comparison with other income sources like interest.
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Franking Credits (Imputation Credits)
Tax credits attached to dividends representing company tax already paid on the profits, preventing double taxation.
Unfranked Dividend
A dividend paid from profits on which no Australian company tax has been paid, so no franking credits are attached.
Partially Franked Dividend
A dividend where only part of the underlying profits have been taxed in Australia, so only partial franking credits are attached.
Company Tax Rate
The flat rate of tax applied to company profits — 25% for base rate entities (turnover under $50 million) and 30% for others.
Dividend Reinvestment Plan (DRP)
A plan that automatically reinvests your dividends or distributions into additional shares or units instead of paying cash.