Invest in high yielding bank stock vs placing money in offset.

Discussion in 'Share Investing Strategies, Theories & Education' started by Investor_84, 10th Apr, 2020.

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  1. Investor_84

    Investor_84 Well-Known Member

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    Location:
    Greenacre, NSW
    Hi all,

    I am considering whether to use my extra funds to keep in my investment property offset account or invest in a bank stock paying high dividend yield.

    Assumptions:
    1) Share price value is consistent over the full year period
    2) Current Investment home loan rate is 2.89% - in other words ill be saving 2.89% interest charged the more i have in the offset.
    3) Gross salary $120,000 (not including super or end of year bonus) with a tax rate of 29%

    Which option am i better off considering the above assumptions and based on the below?

    Current Westpac share price $16.00
    Interim Dividend May 2019 $0.80
    Final Dividend Nov 2019 $ 0.80
    Franking 100%

    Scenario
    No. of Westpac shares bought if purchased $500,000 at current Westpac share price: 31250
    Interim Dividend based on the No. of Westpac shares bought $25,000.00
    Final Dividend based on the No. of Westpac shares bought $ 25,000.00
    Total Dividend ($) earned from both dividends $50,000.00
    Total Dividend (%) earned from both dividends based on your initial investment of $500,000: 10%

    Questions based on the above:

    1) Which one am I better off from a net profit perspective (including any tax implications)

    > Dividend Reinvestment Plan (DRP) - Bank offers to reinvest the dividend profits back in to buying westpac shares at the current share price at the time. Based on the below statement from ATO I am assuming you still get taxed even if you reinvest the profits back in to the bank via this DRP

    All shares issued under DRPs are treated, for tax purposes, as if a cash dividend had been received. Franking credits are dealt with in exactly the same manner.

    When shares issued under a DRP are sold, the cost base for CGT is determined by the market price of the shares at the time of the associated dividend distribution.

    If the shares were issued at a discount, the discount does not constitute assessable income at the time of issue. However, it does result in a lower acquisition cost for the new shares and this will result in a correspondingly higher taxable capital gain on any subsequent disposal.


    OR

    > Taking the dividends out each time

    OR

    > Neither of the above, keep it in offset and save 2.89% interest


    2) Can I just buy the shares before the ex dividend date and sell straight after to get the dividend each time? Or am i better off to keep it in there for the full year to also get the CGT discount for holding the shares for more than a year?

    Sorry about the formatting above, i copied this all from my excel sheet, if anyone prefers me to send them the excel version please provide your contact email :)
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    2) read up on the 45 day rule
     
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  3. Investor_84

    Investor_84 Well-Known Member

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    Hi terry what 45 day rule you able to send me
    The link?
     
  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    i assume u have non ded debt

    and the 500 k is saved, tax paid cash ?
    ta
    rolf
     
  5. Investor_84

    Investor_84 Well-Known Member

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    Location:
    Greenacre, NSW
    Hi Rolf

    Correct the 500K is post tax cash in my offset

    and I have no non deductible debt my owner occupier homeloan is paid off
     
  6. mrdobalina

    mrdobalina Well-Known Member

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    Most of the big banks in Europe and US have been forced, or are planning to, cancel their dividend payments to shore up capital. Our banks will most likely do the same (at least for the next dividend payment).
     
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  7. The Y-man

    The Y-man Moderator Staff Member

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    You and your shares 2019

    The Y-man
     
  8. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    I could be wrong but I recall OZ banks have some of the largest margins in the world, which is why I can get a mortgage in Germany at 1.5x,and 2.9 here ??????????

    Not my area of expertise btw

    ta
    rolf
     
  9. Omnidragon

    Omnidragon Well-Known Member

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    If you purely wanted the yield then you might as well look at converts or hybrids against blue chips. Check the term there’s no mandatory conversion.