High yielding dividend shares are stodgy, boring and unlikely to outperform the market – correct? We want to invest in shares with the potential for above average share price growth. Well…Yes and .. Yes…you can have the best of both worlds. Regular income and share price growth. And if you live in Australia, this is capped off with generous tax credits.

Think About the Total Shareholder Return

When assessing the performance of stocks, inexperienced investors risk falling into the trap of looking purely at short term stock price movements, in the process ignoring the value of dividends which may be paid.

The dividend income shares figure should include any special one-off dividend payments, in addition to routine, biannual dividend payouts. As well, in Australia we should include franking credits.

It is possible that a stock could deliver a negative price performance over a certain period yet still generate a positive total shareholder return as the dividend paid can outweigh the stock price fall.

Franking Credits are the Cream on the Cake…

If dividends are the icing on the cake of shareholder returns, then franking credits are a generous layer of cream. Dividend imputation allows many companies to pay dividends that are effectively tax free, even giving the investor a tax credit, making share investment an even more attractive proposition.

The easiest way for an investor to value a franked dividend is to think of the franking credit as part of the income they receive. The investor doesn’t get it in cash, only as a kind of IOU from the tax office, but nonetheless it and the cash portion make up pre-tax income. So a fully franked dividend of $0.70 plus $0.30 credit is exactly equal to an unfranked dividend of $1.00, or to bank interest of $1.00, or any other ordinary income of that amount. (It’s exactly equivalent because franking is fully refundable, as described above.)

Franking credits can amount to almost 43% of the value of the dividend for Australian companies earning all of their profit domestically. Basically, you the investor get credited for the tax that the company has already paid in the process of earning the dividend – so double taxation is avoided.

Dividends Tell the Shares Story

Don’t be seduced by an unrealistically high dividend yield. These companies may be about to fall of a cliff. Look for stable dividends that grow steadily over time.

Finance theorists use forecast dividends to value shares. One method is to take the current dividend and divide it by the risk free rate less the forecast dividend growth rate. The greater the growth rate the greater the share valuation.Dividend forecasts are what many investors use to assess prospective share investments.

Companies that have strong businesses, good profit margins and growth prospects will produce increasing profits and dividend distributions. Company shares with reliable dividends that grow at a steady rate will outperform the market