Dividends and changes in the imputation system

There are people I know whose mood is determined by the stockmarket's direction - and they're not just stockbrokers and fund managers. It seems odd to me: after all, the market will always rise or fall. I think it's far better to set your mood by the things you are doing, rather than the things you own. But each to their own.

Their mood should be ebullient right now. The market has had a wonderful run in the past year (up around 15%), fuelled by the stocks most Australians use as portfolio cornerstones (the banks and Telstra). And until opinion about the direction of interest rates changes, stock prices will keep going north.

As interest rates fall, share prices rise. This is a truism based on the yields of shares becoming more attractive the further interest rates fall. So the performance of shares that produce strong dividends is a quotient of the improvement in the payout versus the direction of interest rates. Right now profits are generally higher, so payouts are stronger. And interest rates are at record lows and likely to fall further. Happy days.

There's another factor. The federal government has promised a review of our tax system. Because of the political climate, it has been delayed until later this year.

The headliner, so far, in the tax review is the goods and services tax. Should it be raised? Should it be broadened? It has taken attention away from a range of other ideas that are equally important, especially for investors. Such as: Should negative gearing be abolished or diminished? Should post-retirement income streams be taxed more than they are currently? Should the benefits of dividend imputation be reduced?

Get stories like this in our newsletters.