Who will be affected by Labor’s franking credits policy? It’s not just retirees.

Over the last couple of weeks, we’ve been delving into the topic of Labor’s franking credits policy and the implications for all Australian investors and particularly retirees. The proposed changes, which are scheduled to be implemented by June 1 of this year if Labor wins the upcoming election, will have a dramatic impact on how all of us prepare our investments in retirement.

But the changes won’t just be impacting those in retirement.  As we discussed last week when Australia’s biggest companies become less attractive to a large section of the trading population, it doesn’t take a genius to figure out there will, more than likely, be more sellers than buyers. And when that happens it leads to share price falls. Which in turn means capital losses. And that affects everybody, regardless of whether you were previously receiving franking credit rebates or not.

What does it mean for retirees?

For retirees, it’s a double whammy. They’ll be missing out on the franking credit rebate, and potentially enduring capital losses on top. A nice thank you for all of your hard work. And this doesn’t take into account the fact that it won’t be as desirable for large Aussie companies to offer franked dividends going forward. They may move away from the process altogether.

Fully franked, high dividend paying shares have been the ideal investment for those in retirement who didn’t need to pay tax. It was almost too easy – Labor certainly thought so anyway. It has been the ultimate strategy for well over a decade.

What can you do about it?

Laws change, however, and the market adapts to new rules. And as investors, we have to adapt with it, or we’ll be left behind. The good thing is there are plenty of other alternatives out there. You just have to be a little proactive and do a bit of research.

A lot has changed over the last decade. Advancements in technology have given traders access to different markets and different products they only ever dreamed of in the past, and at a cost that is as good if not better than trading in BHP or CBA. And you don’t even have to leave your lounge room.

Considering property or bonds?

If you wish to restrict your investments to just Australia, you can look at REITs, which is the acronym for Real Estate Investment Trusts. They are commonly high yield investments, paying regular unfranked dividends, so they’re generally unaffected by Labor policy changes. Of course, you’re then investing in Aussie real estate which hasn’t looked too flash lately, but the opportunity is there if you fancy the chances of a housing comeback in Oz – which, of course, is probably less likely if Labor wins the election and negative gearing is pared back, which is why we’re talking about this issue in the first place.

You’ve also got the option of trading in Aussie corporate bonds. Effectively you’re lending an Australian company money, and you can generally choose many of the major stocks on the ASX, who then agrees to pay you interest on your loan. They’re low risk, high paying yields, and you can trade them through most online broker platforms in the same way you trade shares.

Looking beyond our borders.

Of course, If you want to be a little bit braver and step out of your little Aussie bubble, we highly recommend trading US shares. The market cap of the ASX is currently sitting around $1.5 trillion USD and is the 16th largest stock exchange in the world. Compare this to the largest exchange, the New York Stock Exchange (NYSE), which has a market cap of $23.1 trillion USD and you can start to imagine the sheer number of opportunities that open up to you when investing in US stocks.

The second biggest exchange in the world has a market cap of $10.3 trillion USD. It’s called the Nasdaq and it is also in the US. Did you know that you can trade stocks such as Apple, Amazon, Google, Netflix, Microsoft, Coke, McDonald’s, eBay, Ford, Nike, Walt Disney, Visa and countless other multinational companies with the ease and the price equivalent of how you buy Australian stocks?

It’s literally that easy. At Capital 19 you can invest in both Australian and US stocks from the one account. And with most good brokers you can do all of your Aussie and US shares in the same account. You have all the biggest companies in the world at your fingertips. A great way to diversify away from your Aussie portfolio which most likely includes four banks, three mining companies, and a couple of supermarkets – that are now less inclined to pay franking credits.

What about dividends?

Now US stocks don’t pay good dividends as a rule. Mainly because they don’t have a franking credit system as generous as ours – or at least as ours has been. This meant there was no real demand from shareholders to want them and no real encouragement for companies to offer them. Of course, there are some that still do. Mostly it is tokenistic, although there a few unique ones who, much like our REITs, offer chunky yields on their investments.

Australian companies use dividends to help disburse their profits to shareholders. But do you know how US companies prefer to do it? They do what is called share buybacks. That is, they buy back shares of their own company. This means there are fewer shares on offer, instantly making the shares you own more valuable. It has exactly the same effect as paying out a dividend, without the tax implications. Fewer dividend handouts, but more capital gains.

Options strategy. What is it?

There’s also another strategy we’ll be employing to help clients replace their franking credit rebate income. It’s one that we think will be the most effective method to replace the cash payout. It is a simple strategy, risk-averse, easy to implement and can be done on any stock in the ASX top 50. It involves trading options and no, it is not as big and scary as it sounds.

Options trading can be as easy or complex as you wish to make it. We like to keep things as simple as possible. Therefore the strategy can be accessible to everyone. It involves selling call options over the stock you already hold. You bring in an income for selling the call and if the stock falls you get to keep the cash, while if the stock rises up to the strike price you make a capital gain – and you still get to keep the cash.

I won’t go into all the details in this article. Matthew did a webinar last week which covered everything perfectly. If you missed it, I’ll attach it again here [Webinar- What are your options if the franking credits proposal becomes legislation?]. It’s simple, it’s cost-effective, and most importantly it brings in a solid income, exactly the thing that Labor plans to take away. Give it a look if you have some time to invest.

Most of our clients are already doing this on their own, but if you’re a little anxious about trading online,  Capital 19 will even place the trades on behalf of the client, and at the same low cost as those who do it themselves.

So you have plenty of options (pardon the pun). Whether it’s trading bonds, REITs, US shares, or selling calls over your Aussie shares. There’s a world of investments out there that you have probably never bothered to look for. And you’ll probably find it’s a lot more interesting than holding onto four banks and a couple of mining companies.

If you’re unsure of how to go about it just give us a call. It’s not like the old days where you had to pay through the nose to get someone to put a trade on for you. The internet has made trading in any type of investment product cheap, simple, and accessible. The world is at your fingertips, and there is little need to rely on a cash rebate from the government to have a successful investment portfolio.