💵 Dividend Yield and NZ Imputation Credits

Dividend Yield Explained

What Dividend Yield Measures:

Dividend yield shows annual dividend income as a percentage of share price - the "interest rate" you're earning on your share investment through dividends alone (not including capital gains).

The Formula:

Example:

• Share price: $5.00
• Annual dividend: $0.40 per share
• Dividend yield: ($0.40 ÷ $5.00) × 100 = 8%

Interpreting Dividend Yield:

• High yield (6%+): Attractive income, but check sustainability
• Moderate yield (3-6%): Typical for NZ dividend stocks
• Low yield (0-3%): Growth-focused company or overvalued stock
• Zero yield: Company pays no dividend (growth stock)

Typical NZ Dividend Yields (Historical Averages):

• NZX50 average: ~4-5% yield
• Utilities (Contact, Mercury): 5-7% yields common
• Banks (ANZ, Westpac NZ operations): 5-6% yields
• Telecommunications: Variable but often 4-6%
• Growth tech companies: Often 0% (no dividends)

Yield Changes:

Dividend yield changes when either share price or dividend amount changes:

• Share price rises: Yield decreases (same dividend ÷ higher price)
• Share price falls: Yield increases (same dividend ÷ lower price)
• Dividend increases: Yield increases
• Dividend cut: Yield decreases

High Yield Warning Signs:

Very high yields (10%+) can be red flags:

• Share price crashed due to company problems
• Dividend likely unsustainable and may be cut
• Market expects dividend reduction

NZ Imputation Credits

What Imputation Credits Are:

NZ companies pay tax on their profits (currently 28% company tax rate). When they pay dividends from after-tax profits, they attach "imputation credits" showing tax already paid. This prevents you being taxed twice on the same income.

How It Works:

• Company earns $100 profit
• Pays $28 company tax (28%)
• Has $72 after-tax profit
• Pays $72 dividend to shareholders
• Attaches $28 imputation credit showing tax paid
• For tax purposes, you received $100 ($72 cash + $28 credit)

Tax Impact by Your Tax Rate:

If your tax rate is 17.5% (lower than company rate):

• Tax due on $100: $17.50
• Imputation credit: $28
• IRD refunds you: $10.50
• Result: You receive $72 dividend + $10.50 refund = $82.50 total

If your tax rate is 28% (same as company rate):

• Tax due on $100: $28
• Imputation credit: $28
• No refund, no extra tax
• Result: You receive $72 dividend

If your tax rate is 33% or 39% (higher than company rate):

• Tax due on $100 at 33%: $33
• Imputation credit: $28
• You owe IRD: $5
• Result: You receive $72 dividend - $5 tax = $67 net

Why Imputation Credits Matter:

• Low income earners: Can receive tax refunds from dividends
• Retirees: Often in low tax brackets, benefit significantly
• High income earners: Still better than being taxed twice, but pay top-up
• NZ vs overseas shares: Only NZ companies provide imputation credits

Franking Credits (Australian Context):

Australia has similar system called "franking credits." If you own Australian shares through NZ broker:

• Australian company attaches franking credits
• Complex tax treatment for NZ residents
• Generally less beneficial than NZ imputation for NZ taxpayers
• Consult tax advisor for Australian dividend income

Fully vs Partially Imputed Dividends:

• Fully imputed: Full imputation credit attached (company paid NZ tax on all profits)
• Partially imputed: Some profits earned overseas, only NZ portion has credits
• Unimputed: No credits attached (rare for NZ companies)

🌱 Dividend vs Growth Investing & Reinvestment

Dividend vs Growth Investing

Dividend Investing Strategy:

Focus on companies that pay regular, sustainable dividends.

Characteristics:

• Mature, established companies
• Steady, predictable earnings
• Regular cash income for investors
• Often lower share price volatility
• Examples: Utilities, banks, telecommunications

Advantages:

• Regular income stream
• Less reliance on share price growth
• Can fund living expenses (retirees)
• Psychological benefit of seeing cash payments
• Imputation credits provide tax benefits

Disadvantages:

• Lower capital growth potential
• Dividend income is taxable
• High-yield stocks may cut dividends if profits fall
• Can miss out on fast-growing sectors

Growth Investing Strategy:

Focus on companies reinvesting profits for expansion rather than paying dividends.

Characteristics:

• Younger, expanding companies
• High profit reinvestment rate
• Share price growth primary return
• Higher volatility
• Examples: Technology companies, startups, high-growth sectors

Advantages:

• Higher long-term growth potential
• Capital gains tax-free in NZ (except traders)
• Compounding through reinvestment within company
• Flexibility to sell when needed (create own "dividend")

Disadvantages:

• No regular income
• Higher volatility and risk
• Must sell shares to access cash
• Returns uncertain and lumpy

Which Strategy Suits You?

Dividend Investing Suits:

• Retirees needing income to fund living expenses
• Conservative investors preferring steady returns
• Those in low tax brackets (maximize imputation benefit)
• Investors uncomfortable with high volatility

Growth Investing Suits:

• Young investors with long time horizon
• Those not needing current income
• Higher risk tolerance for higher potential returns
• High income earners (avoid taxable dividend income)

Balanced Approach:

Many investors hold both dividend and growth stocks:

• 60% dividend stocks for income and stability
• 40% growth stocks for capital appreciation
• Adjust ratio based on age, income needs, risk tolerance

Reinvesting Dividends

What Dividend Reinvestment Means:

Instead of taking dividend payments as cash, use them to buy more shares automatically.

How It Works:

• Company pays dividend
• Instead of cash to bank account, dividend used to purchase more shares
• Own slightly more shares next dividend payment
• Compounds over time

Dividend Reinvestment Plans (DRPs):

Many NZ companies offer formal DRPs:

• Automatic: Enroll once, dividends reinvested automatically
• Discount: Some offer 2-5% discount to market price
• No fees: No brokerage fees for reinvested shares
• Fractional shares: Can buy partial shares with exact dividend amount

Manual Reinvestment:

If company doesn't offer DRP, can reinvest manually:

• Receive dividend as cash
• Use cash to buy more shares through broker
• Pay brokerage fees
• Can only buy whole shares

Power of Dividend Reinvestment:

Example: $10,000 invested in 5% dividend yield stock

Without reinvestment (take cash):

• Year 1: $500 dividend (spend)
• Year 10: Still own $10,000 worth, received $5,000 total dividends
• Total value: $10,000 shares + $5,000 cash = $15,000

With reinvestment (buy more shares):

• Year 1: $500 dividend buys more shares
• Year 2: Larger holding pays larger dividend, reinvest again
• Year 10: Own ~$16,300 worth of shares (assuming stable price)
• Total value: $16,300 (31% more than taking cash)

Over 30 years: Reinvestment compounds dramatically. Same $10,000 with 5% yield fully reinvested grows to ~$43,000 (assuming stable share price). Without reinvestment: $10,000 shares + $15,000 cash dividends = $25,000 total.

Tax Considerations:

• Still taxable: Reinvested dividends are taxable income in year received
• Must pay tax: Even though you didn't receive cash
• Plan ahead: Need cash source to pay tax on reinvested dividends
• Imputation credits: Still apply to reinvested dividends

When to Reinvest vs Take Cash:

Reinvest when:

• Long time horizon (10+ years)
• Don't need income for living expenses
• Want to compound wealth
• Have other income to pay tax on dividends

Take cash when:

• Need income for living expenses (retirees)
• Want to diversify (invest dividends elsewhere)
• Share appears overvalued (better opportunities elsewhere)
• Need cash to pay tax on dividends

🏢 NZ Scenario and Dividend Investor Checklist

NZ Scenario: David, Contact Energy Shareholder

Background:

• David: 58, planning for retirement in 7 years
• Owns 10,000 Contact Energy shares
• Building dividend income portfolio for retirement
• Tax rate: 33% (PIR rate 28%)

Contact Energy Share Details (Example Based on Historical):

• Share price: $8.50
• Total investment value: 10,000 × $8.50 = $85,000
• Annual dividend: $0.51 per share ($0.255 interim + $0.255 final)
• Dividend yield: ($0.51 ÷ $8.50) × 100 = 6%
• Fully imputed: Imputation credits attached

David's Dividend Income (Per Year):

• Interim dividend: 10,000 × $0.255 = $2,550 (usually February)
• Final dividend: 10,000 × $0.255 = $2,550 (usually August)
• Total annual cash: $5,100

Imputation Credit Benefit:

• Gross dividend (including imputation): $7,083
• Imputation credits: $1,983 (28% of gross)
• David's tax rate: 33%
• Tax due on $7,083: $2,337
• Less imputation credits: $1,983
• Tax to pay: $354
• Net after tax: $5,100 - $354 = $4,746
• Effective tax rate: 7% (instead of 33% without imputation)

David's Strategy:

Current Phase (7 years to retirement):

• Enrolled in Contact's DRP (Dividend Reinvestment Plan)
• All dividends automatically buy more Contact shares
• Compounds holdings over 7 years
• Pays tax on dividends from salary (imputation credits reduce tax owed)

Projected Growth:

• Starting: 10,000 shares worth $85,000
• After 7 years of reinvesting 6% yield: ~14,200 shares
• If share price unchanged: $120,700 value
• Plus any capital gains if share price increases

At Retirement:

• Stop reinvesting dividends
• Take cash payments for living expenses
• With 14,200 shares at $0.51 annual dividend: $7,242/year income
• Tax rate likely 17.5% in retirement (lower income)
• With imputation credits, likely get tax refund
• Net income: ~$7,800/year (including imputation refund)

Diversification Plan:

David doesn't rely only on Contact Energy:

• Contact Energy: 30% of portfolio
• Mercury Energy: 15%
• Spark: 15%
• ANZ Bank: 20%
• NZ diversified dividend fund: 20%

This spreads risk across companies and sectors while maintaining dividend income focus.

Lessons from David's Approach:

• Dividend reinvestment compounds wealth during accumulation
• Switch to income when needed (retirement)
• Imputation credits significantly benefit lower tax brackets
• Diversification reduces risk of dividend cuts
• Long-term focus (7+ years) allows compounding to work

Dividend Investor Checklist

Assessing a Dividend Stock:

1. Dividend Yield:

• ☐ Current dividend yield: _____%
• ☐ Compared to sector average: Higher / Similar / Lower
• ☐ Yield reasonable (3-7% good, 10%+ investigate why so high)

2. Dividend Sustainability:

• ☐ Payout ratio: ____% (dividends ÷ earnings)
• ☐ Under 80% is sustainable, over 100% unsustainable
• ☐ Company has consistent earnings to support dividend?

3. Dividend History:

• ☐ Years of consecutive dividends: ____
• ☐ Dividend growth trend: Increasing / Stable / Decreasing
• ☐ Any dividend cuts in last 10 years? Yes / No
• ☐ If yes, why and have circumstances changed?

4. Company Fundamentals:

• ☐ Profitable and stable business? Yes / No
• ☐ Debt level manageable? Debt-to-equity ratio: ____
• ☐ Industry facing headwinds or tailwinds?
• ☐ Competitive position: Strong / Moderate / Weak

5. Imputation Credits:

• ☐ Dividends fully / partially / not imputed
• ☐ Your tax rate: _____%
• ☐ Imputation benefit: Refund / Neutral / Pay extra

6. Total Return Potential:

• ☐ Dividend yield: _____%
• ☐ Expected capital growth: ____% per year
• ☐ Total expected return: ____% per year
• ☐ Adequate for goals? Yes / No

Portfolio Management:

Diversification:

• ☐ Number of dividend stocks held: ____
• ☐ Spread across sectors: Energy / Telco / Banks / Utilities / Other
• ☐ Largest single holding: ____% (should be under 20%)

Reinvestment Strategy:

• ☐ Currently reinvesting dividends? Yes / No
• ☐ Enrolled in DRPs where available? Yes / No
• ☐ Timeline to need income: ____ years
• ☐ Plan to switch from reinvestment to income: Yes / No / When: ____

Tax Planning:

• ☐ Annual dividend income expected: $____
• ☐ Tax on dividends (after imputation): $____
• ☐ Cash source to pay tax if reinvesting? Yes / No

Monitoring:

• ☐ Review dividend announcements: Quarterly / Annually
• ☐ Track payout ratios for sustainability
• ☐ Monitor company financial health
• ☐ Assess if yield targets being met

Final insight: Dividend income in NZ: companies pay cash from profits to shareholders, usually twice yearly. Dividend yield = annual dividend ÷ share price × 100, measures income return (typical NZ 4-6%, utilities/banks 5-7%). Imputation credits prevent double taxation - company pays 28% tax, credits passed to shareholders. Low tax bracket investors get refunds, high bracket pay top-up, but still better than double tax. NZ advantage over overseas shares. Dividend investing: mature companies paying regular income, suits retirees and income-seekers, often lower growth. Growth investing: reinvest profits for expansion, higher capital gains potential, no current income, suits long-term investors. Neither inherently better - depends on needs. Reinvesting dividends compounds wealth powerfully over time - $10k at 5% yield reinvested for 30 years = $43k vs $25k taking cash. DRPs automate reinvestment often at discount. Tax still applies to reinvested dividends. NZ scenario: Contact Energy shareholder receives 6% yield with full imputation, reinvests during accumulation, switches to income at retirement. Dividend investor checklist: assess yield, sustainability (payout ratio <80%), dividend history, company fundamentals, imputation value, diversification. Dividends provide income stream from shares beyond capital gains - powerful tool for income-focused investors, particularly in retirement.