Retirement planning can feel complex, but one factor can make a real difference: investments that provide a tax efficient form of income. Perpetual’s Sean Roger breaks down why this matters when you’re looking to grow and protect your wealth.
- LICs offer more consistent, tax efficient dividends
- Current market volatility is creating value opportunities
- Find out about Perpetual Equity Investment Company (ASX:PIC)
- Browse all Perpetual’s Australian share funds
There is a veritable smorgasbord of investment products in the market today for those looking for regular income after retirement. This includes government schemes, mutual funds, managed funds, pension plans and term deposits.
Roger, who co-manages the Perpetual Equity Investment Company (ASX:PIC), says there are several things those planning for retirement and retirees need to consider when investing their money.
This includes the frequency and predictability of the income paid out, tax implications, long-term performance, and market conditions.
One option that ticks the boxes, according to Roger, is a listed investment company (LIC) – which provides investors exposure to a portfolio of Australian equities and is tradeable on the ASX.
“The company structure relative to a unit trust or a managed fund gives the board of the company more flexibility as to the consistency of the dividend, in the sense that they've got more control over what is and isn't paid out at each period,” says Roger.
Managed funds or unit trusts by comparison must distribute all realised gains at the end of each financial year. The LIC structure offers the board flexibility to keep part of the realised gains invested and this can lead to more predictable dividends for investors.
“Secondly, the company itself pays corporate tax on profits generated, which means that it can then attach franking credits to the dividends so that they are passed through to shareholders,” explains Roger.
Franking credits reduce the tax payable on income or for retirees in the pension phase, can lead to cash refunds.
LICs are also closed-end vehicles, which supports better long-term investing, according to Roger.
This structure has historically enabled full deployment during major market lows such as occurred in 2020 when the COVID pandemic took hold.
Roger notes that the market dynamics over the past 18 months have driven significant volatility within sectors and individual stocks.
“The outcome of this is that there are a large number of companies that are trading at historically very low valuations and companies where valuation multiples look very cheap,” he says.
“In our view that's a good backdrop to be deploying capital in the hope that obviously those investments do over time deliver better earnings outcomes and ultimately see their valuation metrics return to historical levels.
“That dynamic of being able to deploy capital at an attractive starting valuation, in our view, increases the chances of capital gains in the future, which ultimately feed into profits and tax payments for the company that can then be distributed to investors through franking.”
Roger sees a number of “reasonable dividend-paying sectors” in Australia that have also been quite weak.
“We're seeing some good opportunities in the small to midcap space in companies that are paying healthy dividend yields,” he explains.
From a sector perspective, resources is one to keep an eye on.
Roger notes that PIC has had a solid allocation to resources over the last 12 months given some of the positive moves in commodity prices.
“There's scope for increased dividend payments out of a lot of the resource companies, which ultimately will flow through to support the profits of these companies.”
About Sean Roger and Perpetual equities
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).
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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