I recently wrote about total return. How much do investors actually end up taking home at the end of the day after investing in stocks?

Theoretically, with a $100,000 initial investment and $1,000 additional investments every month, in 20 years (with returns reinvested), I would have $1,391,009 (assuming a 10% p.a. return).

This is what you actually come out with.

Total return table

Figure: the components of a total return.

One of the saving graces is franking credits. It is a sigh of relief for investors. Over a long time horizon, a meaningful contribution to total returns.

In the above example, the tax rate on average income is assumed – 32.5% (plus a 2% Medicare levy.) However the marginal tax rates have changed (as of 1 July 2024).

Stage 3 tax cuts and a net 0% tax rate for dividends

The tax cuts mean that the median income sits at a 30% tax rate. Most incomes—between $45,001 and $135,000—sit in the 30% tax rate.

Fully franked dividends provide a 30% tax credit.

That is a dividend which requires a payment of 0% in personal income tax.

No investment decisions should be based on how much tax you can save. However, it is important for investors to think about that total return table. Every line item (bar franking credits) detracts from the return that you earn.

For income investors, franking credits are a welcome respite from the tax rates.

Here are three, five-star^ stocks with fully franked dividends (at 10 October 2024).

Woodside Energy WDS ★★★★★

  • Fair Value estimate: $45 (43% discount at October 11)
  • Moat: None
  • Uncertainty Rating: Medium
  • Star Rating: ★★★★★

Woodside is Australia’s premier oil and gas company with operations across liquid natural gas, natural gas, condensate and crude oil. LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the firm’s mainstay, and the low-cost advantage of these assets form the foundation for Woodside.

A big chunk of Mark Taylor’s intrinsic value estimate for Woodside comes from future project development. This is both a complicated and expensive endeavor, but it is one that Woodside has excelled in for over 25 years and has unparalleled experience domestically.

Woodside also benefits from 20-year off-take agreements several blue-chip Asian energy utilities including Tokyo Electric, Kansai Electric, Chubu Electric, and Osaka Gas. These help ensure sufficient project financing during development and should also add stability to cash flows after completion.

Woodside's deep development pipeline is backed up by what Taylor views as an attractive medium-term demand picture for gas, which is a far cleaner energy source than coal and therefore should play an important role in reducing global emissions.

In terms of dividends, Woodside’s official policy is to pay out a minimum of 50% of underlying earnings to shareholders. Since 2013, though, this has risen toroughly 80%of earnings as Woodside put many of its LNG expansion plans on hold. Taylor thinks this is high and suggests the funds could potentially be better used to accelerate the company’s growth investments.

Nonetheless, Woodside have strong cashflow and a healthy balance sheet that should support ongoing dividend payments that are 100% franked.Taylor expects a total of just under $2 a share in dividends in fiscal 2025 for a forward yield of around 7.5%. At a recent share price of under $26 the company’s shares screen as materially undervalued versus his $45 Fair Value estimate.

Nine Entertainment NEC ★★★★★

  • Fair Value estimate: $2.70 (55% discount at October 11)
  • Moat: None
  • Uncertainty Rating: High
  • Star Rating: ★★★★★

Nine is a collection of media businesses encompassing TV, publishing, radio and digital markets. Almost 50% of Nine’s earnings stem from TV, where it is one of only three players licensed to broadcast to Australia’s metropolitan markets.

The advent of internet-based content has eroded much of the benefits of this oligopoly and has also led to increased competition in Nine’s publishing business, which is responsible for around 20% of earnings and is home to assets including the Sydney Morning Herald and the Australian Financial Review.

The balance of Nine’s underlying earnings come from a 60% equity stake in Domain Holdings (15%), its Stan streaming business (around 10%) and radio stations (5%). With this in mind, it will come as no surprise that advertising sales makes up the bulk of Nine’s revenue. And as advertising spending has weakened in recent years, so has sentiment towards Nine’s stock.

The shares currently trade at less than half of our analyst Brian Han’s $2.70 fair value estimate. Nine’s 2024 results exceeded Han’s forecast, driven by upside surprises in TV and publishing. He also noted that cost-cutting is having an impact and that Nine remains well poised to benefit from a recovery in advertiser spending.

Brian Han expects Nine to pay its shareholders 8.6 cents per share in dividends over fiscal 2025, for a forward yield of almost 7% at present. Nine’s streak of fully-franked dividends stretches back to 2015 and Han doesn’t expect this to change in the near-term.

Beach Energy BPT ★★★★★

  • Fair Value: $2.40 (48% discount at October 11)
  • Moat: None
  • Uncertainty Rating: High
  • Star Rating: ★★★★★

Beach Energy is Australia’s largest onshore oil producer. It produces oil, gas, and gas liquids from multiple wholly owned projects and joint ventures in the onshore Cooper, Perth, and Eromanga basins, and offshore in the Otway, Bass, and Taranaki basins.

Our Beach analyst Mark Taylor has assigned a No Moat rating to Beach, meaning he doesn’t think it benefits from a sustainable competitive advantage. Most moats in commodities come as a result of being a low cost producer, and Beach is not one of them given its development-intensive operations, small fields and onerous product transport costs.

Beach’s share price weakness over recent months was partly due to it reporting a 20% fall in proven and probable reserves from the same time last year. However, Taylor thinks that Beach’s Waitsia Stage 2 gas project in the Perth Basin and other developments leave the company well placed to reverse this.

Taylor recently kept his Fair Value estimate for the shares at $2.40, approximately double the recent market price of around $1.25. In terms of dividends, Taylor expects Beach Energy to pay out six cents per share in fiscal 2025 for a forward yield of almost 5%. The company’s dividends have been fully franked since 2011 and Taylor expects this to continue next year.

 

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.

 

^ What do the different star ratings designations mean?

5 stars indicates an investment idea with a high probability of significant risk-adjusted appreciation from the current market price during a multi-year time frame. Scenario analysis developed by our analysts indicates that the current market price represents an excessively pessimistic outlook, limiting downside risk and maximizing upside potential.

4 stars indicates that appreciation beyond a fair risk-adjusted return is likely.

3 stars indicates that investors are likely to receive a fair risk-adjusted return (approximately cost of equity).

2 stars indicates that investors are likely to receive a less than fair risk-adjusted return and should consider directing their capital elsewhere, in our opinion.

1 star indicates a high probability of undesirable risk-adjusted returns from the current market price over a multi-year time frame. Our scenario analysis indicates the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.