7% yields and 4 income ideas: Where 2 fund managers are investing

There's a lot to think about when it comes to retirement, not least generating consistent monthly income that can sustain you for what could be decades after your working life. 

Now there's another factor. Changes to capital gains tax that take effect from 1 July 2027.

Some investors are already shifting ahead of the change - in Livewire's Retirement Series Survey, 57% of respondents said they planned to invest in high-income shares over the next 12 months, while listed investment companies (LICs) ranked among the top five ways investors intended to generate income. As one reader put it, they're seeking "LICs with a long term focus on income growth to meet inflation."

And it's not just Livewire readers reconsidering their approach.

Damien Boey, portfolio strategist at Wilson Asset Management says more than 40% of respondents to the firm's shareholder surveys said they would change their behaviour in response to the new rules.

In the above interview, I spoke to Damien and Charles Casey, analyst and co-portfolio manager at Solaris Investment Management about the changes in investor behaviour they're seeing, how they deliver regular monthly income across shares and bonds, and share income ideas they're backing ahead of the tax changes.

Investors are making moves

Casey says there is a clear shift ahead of the tax changes already, and unsurprisingly, investors are favouring income over growth.

“The strategies that focus purely on capital growth are now less attractive on an after tax basis. We’ve seen a shift away from those purely growth focused strategies, more towards strategies that have got higher levels of income and particularly franked income, which is more attractive on a relative basis following the Budget.”

Boey says he’s seeing the same shift from conversations with advisers and shareholders, however, tax isn’t the only factor. Hybrids coming off the market are also sending income investors looking for alternatives.

How monthly income actually works

Both Boey and Casey run listed investment companies (LICs) that pay monthly income. WAM Income Maximiser (ASX: WMX) and Solaris Australian Equity Income Plus (ASX: SET) pay monthly fully franked dividends to their shareholders. Most ASX companies pay dividends twice a year, so a monthly payout has to be engineered.

For Casey, the appeal of LICs for income investors is their ability to harvest income, smooth out distributions and provide visibility.

“I think it’s the ability to offer that monthly fully franked dividend. It gives income visibility for the investors.”

“A LIC has the ability to create a dividend reserve that can support that future monthly fully franked income, particularly over multi-year periods, which is one of the really great benefits of a LIC over an ETF, which has to flush out income each year resulting in unpredictable levels of income on a yearly basis.”

Boey explained that the WAM Income Maximiser targets a minimum annual payout of the RBA cash rate plus 2.5% which is then split across 12 months. 

He says the fund’s dividend reserve lets it bank dividends as they come in and spread them across the year but was also upfront on its limitations. “As much as we would like to get the dividend of the underlying investments as close as possible to what we’re paying out, that may not always be the case.”

When there’s a shortfall, Boey says the fund can draw on its profit reserve or on capital growth, though he acknowledged the new CGT rules make capital growth a harder source of income.

Income opportunities in equities and bonds

Casey sees three areas supporting franked income into 2027. The first is resources, helped by high copper and gold prices and decent iron ore prices. The second is oil, gas and refining, as geopolitical conflict has pushed oil prices higher. The third is industrial companies benefiting from the AI build-out.

Boey makes the case for bonds by comparing them with the equity market. The share market as a whole offers a grossed-up yield in the mid-4% range, whereas 20-year fixed Commonwealth Bank debt pays close to 7%. Unlike a dividend, that payment doesn’t rise and fall with the economic cycle.

The catch however, is inflation.

“With bond yields at the moment, there’s a few concerns about inflation, but if you have the conviction at the end that over the next few years monetary policy will work and we will actually be able to bring down inflation, then bonds are really compelling value at the moment.”

So does he expect inflation to ease? I put the question to Boey.

“Yes, I do. What you’ve got in the US is a really classic example because everybody’s following the US cycle....The New York Fed’s actually produced its own measure that it likes to follow. That’s actually pointed to normalisation all the way down to 2.3% now.”

The US is the hardest place to bring inflation down, he argues, and if it’s happening there, he expects Australia to follow.

Four income ideas

Bank bonds and Telstra

Boey likes the 2046 fixed notes from CBA and Westpac, which pay about 7% a year for 20 years. On equities, he likes Telstra (ASX: TLS)  for its defensiveness and a 6% grossed-up yield. 

Goodman Group and Ampol 

While not a "traditional income stock" Solaris forecasts Goodman Group (ASX: GMG) growing earnings by more than 30% over the next three years, which would support future dividends. It's turning industrial property into data centres and trades on 18 times earnings.

"They're building into a growing demand environment with very limited supply."

Casey's other pick was Ampol (ASX: ALD), which has already had a good year. "For income generation in 2027, Ampol's got a very strong and improving balance sheet and they have the ability to pay higher dividends in 2027 with the potential for a special dividend."

Spotting a yield trap

Headline yields can mislead, Boey says, because they assume a company will keep paying the same dividend.

“If you do get particularly hard times for a sector or company or the economy, and you’re starting to talk about dividend cuts, well, something that might have been yielding 10%, well, it’s not yielding 10% anymore - and that’s a trap.”

He pointed to REITs during the GFC that borrowed to fund their dividends. In today's market, with the RBA still talking about further hikes, he flagged two popular income sectors.

"You're talking about banks and you're talking about discretionary names. Maybe they have some trap characteristics until the RBA pivots."

Casey's example was Lendlease (ASX: LLC). It paid 53 cents in dividends over three years while its share price fell from $7.50 to $2.50.

“Investors have earned that dividend income, but they've lost capital in the process."

Solaris avoided the stock because its earnings forecasts kept falling.

"We're very focused on the capital growth outcomes and we prefer positive capital growth for modest levels of dividend rather than negative capital growth for high levels of dividend income," Casey says.

What to do before July 2027

Casey’s advice is to check the balance sheet. Higher bond yields have so far been softened by hedging, where companies locked in their borrowing costs before rates rose. He says that protection will start to run off over the next 12 months.

“There’s quite a few dividend traps from companies that have got too much debt. So I think investors should really analyse the balance sheet settings of their companies.”

Boey's focus is diversification across bonds, equities and commodities.

"The big risk in the last little while has been that bonds and stocks have moved together."

If rates stay higher for longer, he expects growth stocks and rate-sensitive stocks to come under pressure. His answer is to pair long-dated bonds with companies that pay out cash now, rather than those whose value depends on earnings far in the future.