Q. In relation to the Westpac Capital Notes, how does the gross yield of 6.15% p.a. translate to a net yield of 4.31% p.a? What am I missing?
A. Thanks for the question.
Like many of these hybrid securities, the distribution (or dividend) is quoted on a gross basis (i.e. a margin of 3.20% plus the 90-day bank bill). With the 90-day bank bill at around 2.95%, this implies a gross distribution of 6.15% p.a. (3.20% + 2.95% = 6.15%).
However, the dividend is paid on a net basis. The actual amount you receive in cash is the gross distribution multiplied by 0.70 (where 0.70 is 1 – Company Tax Rate).
So, the cash amount is 6.15 multiplied by 0.70 = 4.31
The dividend is, of course, fully franked.
Essentially, Westpac “takes back” the benefit of the franking credit by reducing the cash paid (i.e. multiplying it by 0.70).
That said, it is still correct to compare it to other investments on a gross basis, as they don’t receive any post tax benefits from the imputation credits. Hence, a term deposit paying 4.3% (with no tax benefits) can be compared to this Westpac Capital Note paying 6.15%.
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