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Sean Roger: Why LICs deserve a place in income portfolios

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As rates fall, income without excessive risk is getting harder to find. Listed investment companies could fill that gap. SEAN ROGER explains

LISTED investment companies (LICs) are emerging as an important option for income-focused investors as traditional avenues for generating yield come under pressure, says Perpetual’s Sean Roger.

Income investors have been spoiled for choice in recent years, with elevated term deposit rates, traditional dividend stocks and bank hybrid securities all delivering yield without excessive risk.

But as interest rates decline and equity markets continue to rally, savings accounts are becoming less attractive, and dividend yields are compressing. At the same time, the staged closure of the bank hybrid market is removing another important source of income.

“Investors used to be able to get attractive yields at reasonable valuations. But the market has risen to a point where investors are having to take significant capital risk,” says Roger.

Roger says listed investment companies offering strong, fully franked yields look increasingly attractive as a result.

“Wesfarmers is now trading at a 2.5 per cent dividend yield, same as CBA, whereas they used to be in the 4-5 per cent range. Telstra’s yield has come down below 4 per cent.

“There was a point where you could get 4 per cent-plus term deposit rates.

“The pace that interest rates come down is still up for debate – but the general direction, both here and in the US, is that we will continue to get rate reduction which ultimately will flow through to lower term deposit rates.

“Meanwhile, just over $40 billion of hybrid capital in the market today is being phased out. Hybrids are a very popular place for retail and institutional capital to get an attractive yield. That capital is going to be looking for alternate places to go for that relatively defensive yield.”

LICs advantages

Unlike unit trusts, which must distribute all income each year, LICs are structured as corporations which allows them to retain earnings and smooth dividend payments over time.

“The company structure allows flexibility around distribution payout ratios, which enables the board of LICs to manage distributions in a way that can be a lot more consistent than unit trusts, which are mechanically forced to pay out a certain amount of money depending on profit realised,” he says.

LICs can also attach franking credits to distributions because they pay tax on profits at the company level.

“The company structure means that the income component of the return for investors can be done in a very tax-efficient way for investors,” says Roger.

Franking credits can be particularly valuable for investors in low-tax environments such as self-managed superannuation funds. For some, it can even result in tax refunds on top of dividend income.

Finding value in an expensive market

Despite elevated market valuations, Roger says LICs with a disciplined value lens can still find high-quality companies trading at attractive prices.

“Through having a value and quality lens, we’re able to still find opportunities in the market where we can get access to high-quality companies that may have short-term headwinds,” he says.

That discipline allows portfolios to maintain yield without chasing overstretched names, and to position for recovery in undervalued sectors.

Discounts to NTA

Many LICs are also trading below their net tangible asset (NTA) value – offering investors the chance to access underlying portfolios at a discount.

Roger notes that sector-wide discounts have widened in recent years, partly because high interest rates made alternatives such as term deposits and hybrids more attractive. 

As those options fade, the relative appeal of consistent, fully franked dividends may rise. That means there is potential for discounts to narrow.

 

About Sean Roger and Perpetual equities

Sean is co-portfolio manager for Perpetual’s SHARE-PLUS Long-Short Fund, Perpetual Pure Equity Alpha Fund and the Perpetual Equity Investment Company (ASX:PIC).

Perpetual is a pioneer in Australian quality and value investing, with a heritage dating back to 1886.

We have a track record of contributing value through “active ownership” and deep research.

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STAFF Sean Roger.jpg
Sean Roger
Co-Portfolio Manager - Pure Equity Alpha, SHARE-PLUS Long-Short, Perpetual Equity Investment Company (ASX:PIC)
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Sean Roger
STAFF Sean Roger.jpg

Sean Roger

Co-Portfolio Manager - Pure Equity Alpha, SHARE-PLUS Long-Short, Perpetual Equity Investment Company (ASX:PIC) BAcc
Bio

Years of experience: 12

Years at Perpetual: 11

Sean is the Co-Portfolio Manager for the Perpetual SHARE-PLUS Long-Short Fund, the Perpetual Pure Equity Alpha Fund and the Perpetual Equity Investment Company (ASX:PIC).

Sean joined Perpetual in February 2013 as a Graduate Accountant. He joined the Investments team in August 2014 as an Equities Dealer and was appointed an Equities Analyst in January 2016 where he was responsible for covering a number of stocks in the gaming and agricultural sectors. He was appointed Deputy Portfolio Manager for the Perpetual SHARE-PLUS Long-Short Fund and the Perpetual Pure Equity Alpha Fund in 2021 and 2022 respectively, and was appointed Co-Portfolio Manager of both funds as well as the Perpetual Equity Investment Company (ASX:PIC) in 2025.

Sean has a Bachelor of Accounting from the University of Technology, Sydney and has completed the Chartered Accountants program.

This information was prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426. PIML is the manager for the Perpetual Equity Investment Company Limited (Company) (ASX: PIC) ACN 601 406 419. It is general information only and is not intended to provide you with financial advice. You should consider, with a financial adviser, whether the information is suitable for your circumstances. This information is in summary form and is not necessarily complete. It should be read together with other announcements for the Company lodged with the ASX, which are available at www.asx.com.au.

Neither the Company, PIML nor any company in the Perpetual Group guarantees the performance of, or any return on an investment made in, the Company. Perpetual Group means Perpetual Limited ABN 86 000 431 827 and its subsidiaries. Past performance is not indicative of future performance. All investing involves risk including the possible loss of principal.