Please note this video was filmed on 14 May 2026.
The Australian income investment landscape has been a rather peculiar terrain of late. While the blue-chip income stocks on the ASX have been flexing their muscles with impressive share price performance, their dividend yields have been shrinking. Simultaneously, the persistent tug-of-war between inflation and a series of interest rate hikes, coupled with global geopolitical instability, has seen bond yields climb to more attractive levels.
Sean Roger, from Perpetual Asset Management, succinctly captures the prevailing mood, noting that “there’s no shortage of macro issues” currently demanding attention. However, he points out that it’s often the secondary consequences of these larger economic forces that can have the most significant ripple effects for those seeking a steady income stream from their investments.
In a recent discussion focused on income investing strategies, Roger delved into a spectrum of market dynamics. He touched upon the ongoing market dislocation, the perplexing suppression of ASX yields, the often-overlooked risks lurking in the market, how proposed changes to capital gains tax could reshape the investment equation for income seekers, and identified specific stocks he believes offer compelling prospects amidst a climate of escalating uncertainty.
Navigating the Minefield of Investment Risks
Beyond the headline-grabbing macroeconomic concerns such as artificial intelligence, the volatile situation in the Middle East, and the persistent threat of inflation, Roger highlights the risk of margin squeeze as a key area of focus for Perpetual.
“You’ve got a confluence of pressures on some sectors where you’ve got some inflation and cost pressures,” he explains. “At the same time, you’re seeing demand softness across the economy due to higher interest rates and cost of living pressures. So for companies that are exposed to that, there is a real risk of some earnings pressure.”
He elaborates on the potential fallout: “And if the companies don’t have strong balance sheets, it can be a really nasty situation where you’ve got earnings downside and balance sheets coming into questions. So we’re spending a lot of time making sure that we’re aware of those risks and the positioning of the portfolio reflects that.”
Another widely discussed concern for income investors revolves around valuation risk within prominent ASX income stocks. These include familiar names like Commonwealth Bank (ASX: CBA) and its peers in the Big Four banks, as well as Telstra (ASX: TLS) and Wesfarmers (ASX: WES). The narrative here is one of robust company performance juxtaposed with significant downgrades in other market segments, leading to a general flight to safety. This has propelled these stocks to elevated price points, consequently compressing their dividend yields.
However, this elevated status has placed these stocks on a precarious edge, where even the slightest perceived weakness can trigger a sharp sell-off. This is precisely why the Perpetual Equity Investment Company (ASX: PIC) has steered clear of the Big Four banks for nearly a year, and why Roger advises income investors to proceed with extreme caution.
The dramatic one-day slump in CBA’s share price back in May serves as a stark illustration of how rapidly investor sentiment can shift. “I think CBA obviously falling quite materially post the latest result is a sign of what can happen if that earning stability is not where investors think it is,” Roger observes.
Yet, there’s a potential silver lining for income investors in the event of a prolonged market downturn: a resurgence of dividend yields to more appealing levels. Roger suggests, “All you need to see is a little bit of a wobble in the earnings momentum of the companies that are trading on those valuations and then things can correct and yields can come back.”
Unearthing Income Opportunities in a Challenging Market
The premium valuations observed in the top tier of the market have somewhat diminished the allure of what has traditionally been a highly attractive segment for income-focused investors. This situation has arisen at a time when other areas of the market have experienced significant headwinds. Small-cap stocks have lagged behind their larger counterparts, while the technology and healthcare sectors have been particularly hard-hit, partly due to the rapid advancements in AI and high-profile earnings downgrades.
This confluence of factors seemingly leaves investors with few obvious avenues for attractive income. However, Roger posits that this period of underperformance presents a unique opportunity to be seized. “From an income perspective, whilst there’s not a whole lot of attractive yield at the top of the market, if investors are willing to look into some of those areas that have been hit and where there is a little bit of uncertainty, there is some good income there if you can get comfortable with the earnings outlook for those businesses.”
He identifies two key sectors that are currently presenting compelling income prospects:
- Cyclical Sectors: Companies within this sector, such as JB Hi-Fi (ASX: JBH), are potentially offering dividend yields in the 5-6% range at current prices. These businesses often boast net cash balance sheets and robust business models, making them attractive propositions.
- REIT Sector: The Real Estate Investment Trust (REIT) sector has been impacted by rising interest rates, leading to a decline in share prices and a subsequent increase in dividend yields. GPT Group (ASX: GPT) is cited as an example, currently offering dividend yields exceeding 5%, supported by a strong balance sheet and underlying assets.
“There is income out there if you’re willing to look into some of the places that have been knocked around a little bit,” Roger concludes.
Perpetual’s Stock Convictions
The Perpetual Equity Investment Company (ASX: PIC) aims to provide a consistent income stream through fully-franked dividends derived from a diversified portfolio of both Australian and global equities, supplemented by cash holdings. Roger emphasises that the flexibility to invest globally is a significant advantage, particularly when local opportunities become scarce. “It enables us to flex up that global allocation if we’re just not seeing value or income in the Australian market.”
A prime example of a global holding that might not be on the typical Australian income investor’s radar is Howden Joinery Group PLC (LSE: HWDN). Roger describes Howden’s as a manufacturer and distributor of prefabricated kitchens, a business that, while perhaps not overtly exciting, holds a dominant position in the UK market with a powerful, vertically integrated business model. “It’s got the manufacturing at scale, but it’s also got a decentralised distribution model servicing just the trades. And the combination of those two means that the company’s been able to deliver high quality product at very affordable prices to its customers whilst also delivering attractive returns to shareholders.”
Despite operating within a challenging UK economic environment, Howden Joinery Group has managed to sustain profits and expand its market share, positioning it for future growth. Furthermore, it presents a more attractive valuation compared to many of the benchmark Australian income stocks. “From a valuation perspective, it’s on sub-15 times PE, net cash balance sheet, really well run, pays a dividend and also buying back stock,” Roger notes.
Closer to home, Soul Patts (ASX: SOL) is another company that Roger believes is well-positioned. Perpetual employs a rigorous four-pillar quality filter when identifying investment opportunities: a strong balance sheet, sound management, recurring earnings, and a quality business model. These criteria are particularly crucial during periods of macroeconomic uncertainty, and Soul Patts demonstrates a strong adherence to most, if not all, of these principles.
The company’s merger with Brickworks has provided it with strategic options for capital allocation, and a recent selldown in TPG has bolstered its liquidity, a valuable asset in the current market. “They’ve got a lot of flexibility now in terms of a broader asset portfolio and being able to move that asset mix around,” Roger explains. Even its involvement in private credit offers enhanced flexibility. “They’re investing their own balance sheet into these deals. They’ve also got the flexibility to invest up and down the capital stack, which I think puts them in a unique position to underwrite deals and risk in ways that others in the industry can’t.”
Ultimately, Soul Patts is presented as a company adept at thriving in the prevailing market conditions and serves as a model for investors seeking to navigate a volatile landscape. “The liquidity, the flexibility and the experience of the management team have them really well placed to take advantage of this volatility.”
The Shifting Sands of Capital Gains Tax
The federal government’s widely discussed proposals for changes to capital gains tax (CGT) have certainly stirred debate. While Roger awaits the practical implementation of these changes, he foresees a potential positive outcome for income investors: an enhanced relative attractiveness of income streams.
“The end result of [the CGT changes] is that, in most scenarios, the tax impost on investors for capital gains is going up and therefore the post-tax returns from the capital component of growth is coming down,” Roger elaborates. He continues, “If we think about capital versus income components of return from a relative perspective, there isn’t any change to the tax efficiency of the income that comes from dividends if they’re fully-franked. From a relative perspective, that income’s now become more attractive to capital growth in most scenarios.”
Consequently, Roger believes that “For companies that pay fully-franked dividends, or listed investment companies, I think there’s a relative attractiveness that’s come from that change.” In this context, a potential rebound in dividend yields could not come at a more opportune moment. With a multitude of economic concerns to contend with, this shift could prove to be a welcome development for income-focused investors.
