When it comes to ASX dividend shares, most income investors tend to focus on the trailing dividend yield a company has on offer at any one time. Sure, there is something to be said for a high yield.
Thus, it's understandable that a company like Telstra Corporation Ltd (ASX: TLS), with its 16 cents a share dividend offering 5.23% yield, is arguably more attractive from an income standpoint than, say, Woolworths Group Ltd (ASX: WOW), which currently offers just 2.44% on current pricing.
But, almost uniquely in Australia, the dividend yield of an ASX share isn't the only thing that matters for income investors. There's also the franking credits. Franking is a system that most other countries don't have. It means that shareholders of a company can be acknowledged for the tax 'their' company has already paid.
In the United States, for example, a company's dividend is effectively taxed twice. That's once at the corporate level, and once at the investor level as income tax.
But here in Australia, company dividends derived from a pool of Australia-taxed profits come with a 'receipt' for this tax. Shareholders can offset this against other income (or claim as a cash refund). These 'receipts' are known as franking credits, and they can significantly increase an ASX dividend share's income potential.
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ASX franking heroes
We already touched on how Telstra shares are offering a 5.23% yield on current prices. But Telstra's dividend also comes with full franking credits. That means, if you include the benefits of this franking, Telstra's grossed-up yield rises to a whopping 7.47%.
Franking credits are generated by paying corporate tax to the Australian Taxation Office (ATO). Thus, a company can effectively 'stockpile' franking credits if it doesn't pay all of this taxed profit out at once.
And reporting from the Australian Financial Review (AFR) today reveals the company holding the most franking credits as a proportion of its market capitalisation on the ASX, according to Macquarie Group Ltd (ASX: MQG).
That company is coal miner New Hope Corporation Limited (ASX: NHC). The AFR reports that New Hope currently "has the equivalent of 44 per cent of its market cap [currently $1.2 billion] in franking credits". However, it also notes that New Hope has declined to pay a final dividend in 2020. Although it did pay an interim dividend of 6 cents per share back in May. It seems shareholders might have to wait a little while until they can enjoy the benefits of New Hope's franking pool.
The AFR also notes that BHP Group Ltd (ASX: BHP) has the most franking credits available out of any company in the S&P/ASX 100 Index (ASX: XTO), at 13% of market cap. What's more, the AFR reckons that BHP is far better placed to return these credits to shareholders. That's reportedly due to the strength of its balance sheet at the current time. Unlike New Hope, BHP has paid 2 dividends in 2020. It offers a trailing, grossed-up yield of 5.93% on current pricing.
