A golden rule in choosing investments is to never buy something purely because of its tax advantages.
Doing so can take you down an investing rabbit hole that can expose you to higher risk, fundamentally weak assets, a lack of diversification, hidden costs and make you subject to changes in tax law (more on that later).
But one very easy-to-access and widely owned asset class is so tax-advantaged for self-managed superannuation investors that it may be an exception.
If an SMSF owns a share in a company that pays a franked dividend, it can use the difference between its tax rate and the tax already paid by the company to “gross-up” the yield on the dividend.
That’s because franking credits represent tax paid at the company tax rate of 30 per cent, but a super fund in the accumulation phase is taxed at just 15 per cent, and it pays no tax in the pension phase.
Take the following scenario that might be found in an SMSF with a $1 million portfolio of ASX-listed shares. Let’s assume those shares pay a 5 per cent dividend yield, which is all reinvested, and the dividends grow by 3 per cent a year.
In the first year, the tax credit on the dividend will boost the effective after-tax yield to 6.1 per cent or $60,714. But, as the dividends increase, by year 10, the post-tax yield grows to 13 per cent, and the post-tax dividend grows to $268,510.
If that same investment was made outside the super system and the taxpayer was on the top marginal rate, the effective yield in the first year would be just 3.8 per cent, or $37,857.
By the tenth year, the after-tax yield would be 5.9 per cent.
Super-charged yields in SMSFs could buy you a house
That analysis shows that franking credits help explain how Tim Toohey, the head of strategy at Yarra Capital, showed in a recent Chanticleer column that SMSFs as a group achieved a 34 per cent investment return in the three years to 2023, compared with 20 per cent in “large super” – industry and retail super funds.
“A larger weighting to domestic listed equities (27 per cent in SMSFs compared to 22 per cent in large super) suggests that SMSF members are likely to be benefiting disproportionately from targeting franked dividends. We estimate that this explains over half the 2 per cent p.a. additional return, a very meaningful contribution, particularly when compounded over time,” Toohey wrote in a recent report.
“It’s one thing to have decent dividend-paying companies in terms of the yield, but if they’re companies that also have dividend growth, and you’ve entered that strategy far enough out, it’s quite remarkable the way it compounds through time,” Toohey says.
“You’re getting the benefit of the growth as well as the ongoing yield.”
So which are the best ASX companies for dividends?
To get an idea of how attractive ASX companies are to SMSFs, take the latest data from AUSIEX, which accounts for a third of wholesale trading – trading by financial institutions and advisers – in Australia.
It shows that trading by SMSFs with more than $3 million in holdings in the first half of 2025 was concentrated on Woodside, BHP, the big four banks, Macquarie, Westpac and CSL, along with two ETFs that focus on Australian shares. Two international ETFs also featured in the mix. That roll-call includes the seven companies that paid more than half the total dividend cheques in Australia in 2024.
“Franking credits are great, and I think they are underappreciated by the market,” Price says. “It’s a simple fact that $1 of franking credit is worth the same as $1 of cash. It’s not quite a free lunch, but the analysis would suggest that the market doesn’t fully value it.”
Price names BHP, Origin, Macquarie, BlueScope and Telstra as companies that meet his criteria of having healthy dividends and good potential for capital growth.
His “fund is really aimed at people who do care about the split between income and capital, and want more of their return in the form of income,” he says.
But why doesn’t the ASX have ‘dividend aristocrats’?
CSL is sometimes touted as potentially Australia’s first “dividend aristocrat”. That is a company that consistently increases its dividend every year. It doesn’t have to be a high-yielding company, but it has to show a long period of growth.
A record of increasing dividends is important because dividend growth directly relates to total return growth, says Jonathan Nurick, chief investment officer of DivGro – a fund that bases its strategy on buying dividend aristocrats (while looking at 120 other criteria as well).
“The total return generally will approximate the dividend growth rate, especially in a company where the yield is very low,” Nurick says. “Over the long arc of time, if you can sustain a certain rate of dividend growth, your total return should be the annualised rate of change of the dividend plus your initial yield.”
So if a company consistently lifts its dividend by 10 or 20 per cent a year, you can expect your total return – dividend plus capital growth – will be similar to that, he says.
DivGro itself does not categorise any Australian company as a dividend aristocrat – partly because it only buys companies with a 25-year track record of raising dividends – but Nurick says CSL has some of the characteristics it looks for.
“It has a fairly compelling dividend growth record, but because it’s one of the largest constituents on the ASX, it is widely followed and often bid up to relatively high multiples,” Nurick says. CSL, like all companies exposed to the US, is also facing the growing reality of political risk. Donald Trump has threatened to put 200 per cent tariffs on pharmaceuticals, for example.
Another company that gets mentioned in this category is Soul Patts. It has paid a dividend every year since it listed in 1903, and its ordinary dividends have risen every year since 2000. Although it has occasionally paid special dividends over that time, which means its total dividends have not always risen.
Nurick also points to TechnologyOne as meeting most of its criteria, but again, when compared to companies in the US – where DivGro finds most of its investments – there are more attractive companies there.
“There are some interesting things in Australia. We just prefer what we see in the US,” he says. The fund, which is open to wholesale investors with a minimum of $100,000 to invest, also has a minimum size.
So if you are looking for aristocrats – that won’t get the same franking credits as those in the ASX – Nurick points to Mastercard, Abbott Laboratories, Microsoft and Ropa Technologies as among the companies he holds.
“There is a minimum market cap that we can go into, and we set that at $US5 billion, and that already just excludes many, many companies in Australia.”
The dividend traps to be careful of
But not all dividend-paying stocks are equal. Companies that pay very high dividends – or pay unfranked or partially franked dividends – won’t deliver the same income boost as others.
The second category is obvious – if a dividend is unfranked, no tax has been paid on it, so you won’t get any benefit from it. If it is partially franked, you won’t get as big a benefit because a smaller proportion of tax has been paid.
In the first category, a high dividend can be a sign that its underlying earnings are declining, meaning its market value will too.
A company’s dividend yield is a function of the dividend divided by the share price. If the share price of the company plummets, the dividend yield might look very attractive, but it might not be sustainable.
When looking at shares, you should assess the total return – that is the share price performance and the yield. If both rise, that is likely to indicate a company with better prospects than one where either is falling.
Analysis of dividend payments by S&P Global analyst Jason Ye supports this.
His research suggests that over the 25 years since 2000, the highest total returns on the ASX 300 index of the 300 largest companies on the stock exchange have come from the companies that pay the second-highest dividends in any given period rather than the highest payers. If you want to understand why that is, read this fuller explanation.
The second-highest group of dividend payers (those ranked 61st to 120th in the 300) delivered an annualised total return of 10 per cent versus 8 per cent for the highest dividend payers.
So you might be thinking at this stage that SMSFs would be crazy to hold anything but Australian dividend-paying shares. But there are two good reasons why that would probably be a mistake. The first relates to diversification, and the second relates to tax and the whims of governments.
Why after-tax returns matter more than yield
Patrick Anwandter, a senior adviser at Kennedy Partners Wealth, agrees with Toohey’s analysis that franking credits boost the after-tax returns of superannuation funds. But that other investments also offer strong returns, particularly international shares over the past three years and even private credit.
“A fully franked yield of 5 per cent (grossed up to 7.14 per cent) generates the same after-tax yield as any other investment, such as a private credit fund, that pays distributions of 7.14 per cent fully taxable.”
For Anwandter, looking at the return of a single asset class in isolation is less important than constructing a diversified portfolio that looks at the following factors:
The expected total after-tax return compared to the objectives of the investor.
The expected after-tax cash flow compared to cash flow needs, notwithstanding the importance of maintaining liquidity in the fund.
The level of expected portfolio risk compared to the investor’s risk tolerance.
“And don’t forget the current Labor government [when in opposition] has tried to eliminate the refund of excess franking credits.”
Which brings us back to tax.
With the budget deficit forecast to blow out in future years, the government may come under pressure to revisit its abandoned policy of reducing franking credit concessions.
“Doing something simply because of the tax benefit is a false game,” says Gareth Croy, founder of Your Future Strategy wealth management company.
“If there is an investment that only stacks up because of the tax benefit, that could be short-lived. We saw a general election not that long ago that was lost simply because of some conversation around franking credits.
“I’d be much more interested in what the fundamentals are of the underlying asset or investment are before the tax benefits.
“It needs to stack up fundamentally first. It can’t be the only reason to make the investment.”
That brings us back to the golden rule in the first paragraph.
About Your Future Strategy
Your Future Strategy is a multi-disciplinary financial services firm with experts across the financial landscape including qualified professionals in financial planning, strategic accounting, lending, investments, estate planning and superannuation.
As financial strategists, they help create a well-designed pathway for people to tick off financial goals to give them choice in their future, whether that’s saving for children’s schooling and university, building a significant property portfolio, creating and protecting their legacy, or retiring early.
Young Aussies are no longer waiting until later in life to enjoy retirement, with a new trend seeing many of them stopping work before they are even out of their 20s.
The ‘micro-retirement’ trend is increasing in popularity, particularly among Gen Z and Millennial workers, seeing them turn away from the traditional retirement model that heavily relies on superannuation.
The following article has been taken from The Australian Financial Review, published Friday 18th July. Read the article in full here: https://www.afr.com/wealth/superannuation/this-hidden-handout-could-pump-your-smsf-up-by-665-058-20250716-p5mfdq
A golden rule in choosing investments is to never buy something purely because of its tax advantages.
Doing so can take you down an investing rabbit hole that can expose you to higher risk, fundamentally weak assets, a lack of diversification, hidden costs and make you subject to changes in tax law (more on that later).
But one very easy-to-access and widely owned asset class is so tax-advantaged for self-managed superannuation investors that it may be an exception.
We are talking about Australian shares and the franking credits that boost the after-tax return of the dividends they pay for some investors.
If an SMSF owns a share in a company that pays a franked dividend, it can use the difference between its tax rate and the tax already paid by the company to “gross-up” the yield on the dividend.
That’s because franking credits represent tax paid at the company tax rate of 30 per cent, but a super fund in the accumulation phase is taxed at just 15 per cent, and it pays no tax in the pension phase.
Take the following scenario that might be found in an SMSF with a $1 million portfolio of ASX-listed shares. Let’s assume those shares pay a 5 per cent dividend yield, which is all reinvested, and the dividends grow by 3 per cent a year.
In the first year, the tax credit on the dividend will boost the effective after-tax yield to 6.1 per cent or $60,714. But, as the dividends increase, by year 10, the post-tax yield grows to 13 per cent, and the post-tax dividend grows to $268,510.
If that same investment was made outside the super system and the taxpayer was on the top marginal rate, the effective yield in the first year would be just 3.8 per cent, or $37,857.
By the tenth year, the after-tax yield would be 5.9 per cent.
Super-charged yields in SMSFs could buy you a house
Over 10 years, that individual would end up paying $57,128 in tax. But the SMSF would have received $607,930 in tax concessions. That is a $665,058 difference – that’s easily enough to buy a one-bedroom unit in central Sydney or a two-bedroom villa in Melbourne’s Brunswick East, according to Domain.
That analysis shows that franking credits help explain how Tim Toohey, the head of strategy at Yarra Capital, showed in a recent Chanticleer column that SMSFs as a group achieved a 34 per cent investment return in the three years to 2023, compared with 20 per cent in “large super” – industry and retail super funds.
“A larger weighting to domestic listed equities (27 per cent in SMSFs compared to 22 per cent in large super) suggests that SMSF members are likely to be benefiting disproportionately from targeting franked dividends. We estimate that this explains over half the 2 per cent p.a. additional return, a very meaningful contribution, particularly when compounded over time,” Toohey wrote in a recent report.
“It’s one thing to have decent dividend-paying companies in terms of the yield, but if they’re companies that also have dividend growth, and you’ve entered that strategy far enough out, it’s quite remarkable the way it compounds through time,” Toohey says.
“You’re getting the benefit of the growth as well as the ongoing yield.”
So which are the best ASX companies for dividends?
To get an idea of how attractive ASX companies are to SMSFs, take the latest data from AUSIEX, which accounts for a third of wholesale trading – trading by financial institutions and advisers – in Australia.
It shows that trading by SMSFs with more than $3 million in holdings in the first half of 2025 was concentrated on Woodside, BHP, the big four banks, Macquarie, Westpac and CSL, along with two ETFs that focus on Australian shares. Two international ETFs also featured in the mix. That roll-call includes the seven companies that paid more than half the total dividend cheques in Australia in 2024.
They are CBA, NAB, ANZ, Westpac, BHP, Fortescue and Woodside Energy, says Michael Price, portfolio manager of the $810 million Ausbil Active Dividend Income Fund.
“Franking credits are great, and I think they are underappreciated by the market,” Price says. “It’s a simple fact that $1 of franking credit is worth the same as $1 of cash. It’s not quite a free lunch, but the analysis would suggest that the market doesn’t fully value it.”
Price names BHP, Origin, Macquarie, BlueScope and Telstra as companies that meet his criteria of having healthy dividends and good potential for capital growth.
His “fund is really aimed at people who do care about the split between income and capital, and want more of their return in the form of income,” he says.
But why doesn’t the ASX have ‘dividend aristocrats’?
CSL is sometimes touted as potentially Australia’s first “dividend aristocrat”. That is a company that consistently increases its dividend every year. It doesn’t have to be a high-yielding company, but it has to show a long period of growth.
A record of increasing dividends is important because dividend growth directly relates to total return growth, says Jonathan Nurick, chief investment officer of DivGro – a fund that bases its strategy on buying dividend aristocrats (while looking at 120 other criteria as well).
“The total return generally will approximate the dividend growth rate, especially in a company where the yield is very low,” Nurick says. “Over the long arc of time, if you can sustain a certain rate of dividend growth, your total return should be the annualised rate of change of the dividend plus your initial yield.”
So if a company consistently lifts its dividend by 10 or 20 per cent a year, you can expect your total return – dividend plus capital growth – will be similar to that, he says.
DivGro itself does not categorise any Australian company as a dividend aristocrat – partly because it only buys companies with a 25-year track record of raising dividends – but Nurick says CSL has some of the characteristics it looks for.
“It has a fairly compelling dividend growth record, but because it’s one of the largest constituents on the ASX, it is widely followed and often bid up to relatively high multiples,” Nurick says. CSL, like all companies exposed to the US, is also facing the growing reality of political risk. Donald Trump has threatened to put 200 per cent tariffs on pharmaceuticals, for example.
Another company that gets mentioned in this category is Soul Patts. It has paid a dividend every year since it listed in 1903, and its ordinary dividends have risen every year since 2000. Although it has occasionally paid special dividends over that time, which means its total dividends have not always risen.
Nurick also points to TechnologyOne as meeting most of its criteria, but again, when compared to companies in the US – where DivGro finds most of its investments – there are more attractive companies there.
“There are some interesting things in Australia. We just prefer what we see in the US,” he says. The fund, which is open to wholesale investors with a minimum of $100,000 to invest, also has a minimum size.
So if you are looking for aristocrats – that won’t get the same franking credits as those in the ASX – Nurick points to Mastercard, Abbott Laboratories, Microsoft and Ropa Technologies as among the companies he holds.
“There is a minimum market cap that we can go into, and we set that at $US5 billion, and that already just excludes many, many companies in Australia.”
The dividend traps to be careful of
But not all dividend-paying stocks are equal. Companies that pay very high dividends – or pay unfranked or partially franked dividends – won’t deliver the same income boost as others.
The second category is obvious – if a dividend is unfranked, no tax has been paid on it, so you won’t get any benefit from it. If it is partially franked, you won’t get as big a benefit because a smaller proportion of tax has been paid.
In the first category, a high dividend can be a sign that its underlying earnings are declining, meaning its market value will too.
A company’s dividend yield is a function of the dividend divided by the share price. If the share price of the company plummets, the dividend yield might look very attractive, but it might not be sustainable.
When looking at shares, you should assess the total return – that is the share price performance and the yield. If both rise, that is likely to indicate a company with better prospects than one where either is falling.
Analysis of dividend payments by S&P Global analyst Jason Ye supports this.
His research suggests that over the 25 years since 2000, the highest total returns on the ASX 300 index of the 300 largest companies on the stock exchange have come from the companies that pay the second-highest dividends in any given period rather than the highest payers. If you want to understand why that is, read this fuller explanation.
The second-highest group of dividend payers (those ranked 61st to 120th in the 300) delivered an annualised total return of 10 per cent versus 8 per cent for the highest dividend payers.
So you might be thinking at this stage that SMSFs would be crazy to hold anything but Australian dividend-paying shares. But there are two good reasons why that would probably be a mistake. The first relates to diversification, and the second relates to tax and the whims of governments.
Why after-tax returns matter more than yield
Patrick Anwandter, a senior adviser at Kennedy Partners Wealth, agrees with Toohey’s analysis that franking credits boost the after-tax returns of superannuation funds. But that other investments also offer strong returns, particularly international shares over the past three years and even private credit.
“A fully franked yield of 5 per cent (grossed up to 7.14 per cent) generates the same after-tax yield as any other investment, such as a private credit fund, that pays distributions of 7.14 per cent fully taxable.”
For Anwandter, looking at the return of a single asset class in isolation is less important than constructing a diversified portfolio that looks at the following factors:
“And don’t forget the current Labor government [when in opposition] has tried to eliminate the refund of excess franking credits.”
Which brings us back to tax.
With the budget deficit forecast to blow out in future years, the government may come under pressure to revisit its abandoned policy of reducing franking credit concessions.
“Doing something simply because of the tax benefit is a false game,” says Gareth Croy, founder of Your Future Strategy wealth management company.
“If there is an investment that only stacks up because of the tax benefit, that could be short-lived. We saw a general election not that long ago that was lost simply because of some conversation around franking credits.
“I’d be much more interested in what the fundamentals are of the underlying asset or investment are before the tax benefits.
“It needs to stack up fundamentally first. It can’t be the only reason to make the investment.”
That brings us back to the golden rule in the first paragraph.
About Your Future Strategy
Your Future Strategy is a multi-disciplinary financial services firm with experts across the financial landscape including qualified professionals in financial planning, strategic accounting, lending, investments, estate planning and superannuation.
As financial strategists, they help create a well-designed pathway for people to tick off financial goals to give them choice in their future, whether that’s saving for children’s schooling and university, building a significant property portfolio, creating and protecting their legacy, or retiring early.