Why income is as important as ever for long-term investors

Chad Padowitz

Talaria Asset Management

Whether you think there is a bubble, or the current valuations are justified doesn’t matter. It’s a fact that valuations are higher than they have ever been for many companies, especially those dominating the indices. And this points to a potential risk for many investors.

One way to look at this is through the lens of price to revenue ratio, which in the S&P500 is also now at an all-time high. This matters because it means investors are now paying 30-40% more for $1 of sales compared to the previous high (Pre-COVID/dotcom boom). Roughly that’s paying $300 for $100 of revenue.  

Source: Bloomberg

These record-high valuations are broad-based across most sectors with particularly high levels in Technology. This is the result of years of outperformance, but the last 12 months, in particular, have seen a disproportionately large amount of return from capital growth, which will likely be challenged going forward.

We continue to feel strongly that equity markets, particularly in the United States are still home to a large number of companies valued for incredibly low returns at best – or horrible absolute returns at worst.

At the same time yields are down, with many companies having either reduced or cut dividends.

This is where a decent income can make a significant difference to investor returns. Both as an absolute contributor when constructing portfolios and as a diversifying element within them. The issue only becomes more relevant when considering the starting point of market valuations.

Income helps diversify your sources of return.

Looking at the local market this has been the case for over a decade, where the ASX200 has had no growth since 2007, with all returns coming come from dividends or reinvested dividends.  

Source: Bloomberg

At Talaria we like a little more certainty for generating stable long-term returns than just relying on dividends. Having a diversified source of return in the form of income allows investors to keep growing (or spending) their investments in the current market, and sleeping a little better along the way.  

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The information in this article is general information only and is not based on the objectives, financial situation or needs of any particular investor. In deciding whether to acquire, hold or dispose of the product you should obtain a copy of the current Product Disclosure Statement (PDS) for the Fund and consider whether the product is appropriate for you. Wholesale Units in the Talaria Global Equity Fund (the Fund) are issued by Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No. 234454. Talaria Asset Management Pty Ltd ABN 67 130 534 342, AFS Licence No, 333732 is the investment manager and distributor of the Fund. References to “we” means Talaria Asset Management Pty Ltd, the investment manager. A copy of the PDS is available at australianunity.com.au/wealth or by calling Australian Unity Wealth Investor Services team on 13 29 39. Investment decisions should not be made upon the basis of the Fund’s past performance or distribution rate, or any ratings given by a rating agency, since each of these can vary. In addition, ratings need to be understood in the context of the full report issued by the rating agency itself. The information provided in the document is current at the time of publication.

Chad Padowitz
Co-Chief Investment Officer
Talaria Asset Management

Chad is the Co-Chief Investment Officer and co-founder of Talaria Asset Management. He has more than 20 years’ experience in the financial services industry in the UK, South Africa and Australia. Talaria's investment strategy seeks to increase the...

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