Grossing Up The Dividend

Submitted by Share Trading on 27 August, 2010 - 14:42

The rate of return from the dividend payments after taking the benefits of imputation credits (also known as franking credits) to the investors in account is measured through grossing up the dividend.

In the past, dividend yields were quoted by dividing the dividend of the full year in cents per share by the market price in cents per share. This way, the result could be compared very easily and accurately with the yields generated by the other type/form of investments.

However, the system does not work like that any more. In order to make yields from the shares that are paying fully franked dividends comparable on the basis of “after tax” with returns from those paying unfranked dividends, or from securities or deposits paying interest as well as from property investments paying for rents, the yield is now required to be measured by using the method mentioned earlier and then it has to be multiplied by 100/70 to make sure that the 30 percent company tax rate is reflected. When the face value of any franked dividend is multiplied by 1.42857 or 100/70, this is when the term “grossing up” is used.

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