A fully franked dividend of 4% is not equivalent to an unfranked dividend of 4%. When you account for the franking credit (the corporate tax already paid on your behalf), the fully franked dividend is worth significantly more. Understanding grossed-up yield helps you make accurate comparisons between Australian shares and other investments.
Cash Yield vs Grossed-Up Yield
Cash yield — the dividend as a percentage of share price (what you see quoted)
Grossed-up yield — the dividend plus attached franking credits as a percentage of share price (the true pre-tax value of the income)
Grossed-up yield formula (30% corporate tax rate):
$$\text{Grossed-up yield} = \text{Cash yield} \times \frac{1}{1 - 0.30} = \text{Cash yield} \times 1.4286$$
Example: A share with a 4.5% cash yield (fully franked):
- Grossed-up yield = 4.5% × 1.4286 = 6.43% grossed-up yield
This means for every $100 of share price, you receive $4.50 in cash plus $1.93 in franking credits — $6.43 in total pre-tax value.
Grossed-Up Yield Comparison Table
| Cash yield (fully franked) | Grossed-up yield |
|---|---|
| 2.0% | 2.86% |
| 3.0% | 4.29% |
| 3.5% | 5.00% |
| 4.0% | 5.71% |
| 4.5% | 6.43% |
| 5.0% | 7.14% |
| 6.0% | 8.57% |
| 7.0% | 10.00% |
After-Tax Yield by Tax Rate
Your actual after-tax return depends on your marginal tax rate. A lower marginal rate benefits more from franking credits.
Example: $10,000 invested, 5% cash yield (fully franked)
| Marginal tax rate | Cash dividend | Franking credit | Tax payable | Net after-tax income |
|---|---|---|---|---|
| 0% (nil rate / pension super) | $500 | $214 | $0 | $714 (full refund) |
| 19% | $500 | $214 | ($214 × 0% after credit) | $669 |
| 32.5% | $500 | $214 | $39 | $675 |
| 37% | $500 | $214 | $71 | $643 |
| 47% | $500 | $214 | $169 | $545 |
Calculations are simplified. Assumes the grossed-up dividend of $714 is taxed at marginal rate with $214 credit applied.
The key insight: even at the top marginal rate of 47%, the effective after-tax yield on the $714 grossed-up income is approximately 5.45% on the $10,000 invested — still significantly above the 5% gross cash yield after tax, because the franking credit offsets a large portion of the tax.
Franked vs Unfranked: Which Is Better?
To compare a fully franked dividend with an unfranked dividend on an equal after-tax basis, multiply the unfranked dividend needed to match:
$$\text{Unfranked equivalent yield} = \text{Franked yield} \times \frac{1 - \text{marginal tax rate}}{1 - 0.30}$$
Example for a 32.5% marginal tax rate:
A 4.5% fully franked yield is equivalent to receiving an unfranked yield of:
$$4.5% \times \frac{1 - 0.325}{1 - 0.30} = 4.5% \times \frac{0.675}{0.70} = 4.34%$$
This means a 4.5% fully franked dividend provides the same after-tax income as a 4.34% unfranked dividend for someone on 32.5% tax. The advantage of franking grows larger as your marginal rate falls.
Comparing ASX Shares to Term Deposits
Term deposit interest is fully taxable at your marginal rate (no franking credits). A simple comparison:
| Investment | Pre-tax yield | Tax (32.5% marginal) | After-tax yield |
|---|---|---|---|
| Term deposit 4.5% | 4.50% | -1.46% | 3.04% |
| Fully franked share 4.5% | 4.50% (+ $214 credit) | -0.25% net | 4.25% |
The franked share delivers a significantly higher after-tax yield than the equivalent term deposit interest — this is a key reason many Australian retirees hold ASX dividend shares for income.
Limitations
- Share prices fluctuate — a 4.5% yield is calculated at today’s price, but the share could fall 10% in capital value, wiping out multiple years of dividend income
- Dividends are not guaranteed — companies can reduce or suspend dividends
- Past dividend history does not guarantee future payments
- Comparing only yield without considering the quality and sustainability of the business is a common error
Related Articles
- Franking Credits Explained
- Dividend Investing in Australia
- Growth vs Dividend Shares
- ASX Shares hub
- Investing hub
Frequently Asked Questions
What is grossed-up yield? Grossed-up yield adds the value of franking credits to the cash dividend to show the total pre-tax value of the income. For a fully franked dividend at the 30% corporate tax rate, the grossed-up yield is the cash yield divided by 0.70. A 5% cash yield becomes a 7.14% grossed-up yield.
Do ETFs pass on franking credits? Yes. ETFs that hold Australian shares (such as VAS or A200) pass through the underlying dividends and franking credits to unit holders. The fund’s tax statement will show your share of the total dividends and associated franking credits, which you include in your tax return.
Do I get franking credits if I hold shares through a SMSF? Yes. An SMSF in accumulation phase pays 15% tax on income, so franking credits reduce that tax significantly — often producing a refund. An SMSF in pension phase pays 0% tax and receives a full cash refund of all franking credits — one of the most significant tax advantages of a pension-phase SMSF.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.