How retirees can maximise returns from ASX dividend shares: fund manager

Here's an income fund tailored for investors in the lower tax brackets.

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Plato portfolio manager Peter Gardner

Image source: Plato Investment Management

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Ask a Fund Manager

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part 1 of this edition, Peter Gardner, senior portfolio manager & co-founder of Plato Investment Management, explains how the fund works to maximise returns for retirees and zero tax investors.

Motley Fool: How would you describe your fund to a potential client? 

Peter Gardner: The Plato Australian Shares Income Fund aims to help retirees and other zero tax investors meet their income and total return needs.

One of the key differentiators of the fund is that it's specifically managed and tailored for investors in the lower tax brackets. This gives Plato the ability to maximise after-tax investment returns and income by targeting dividends with franking credits, special dividends and off-market buy-backs.

MF: How does that differentiate Plato's income fund from other funds targeting dividends?

PG: Most Australian equities funds have all types of investors within their unit trusts, ranging from high taxpayers through to zero taxpayers, like retirees. Having a mix of tax-paying investors makes it impossible to maximise after-tax income and capital returns for all your clients due to their different tax rates.

On top of this, our fund is built on a very differentiated dividend rotation strategy. We're very nimble in rotating the portfolio to capture dividends. This also helps minimise the typical risks of set-and-forget yield strategies, which can take on significant concentration risk and be overly exposed to potential dividend traps.

MF: How will rising inflation and increasing interest rates impact higher yielding ASX shares?

PG: For some time now, some of the strongest yielding companies have been from the mining and resources sector. And these companies can often benefit from inflation as commodity prices rise. While there have been cost pressures on many of the miners, this has been largely offset by revenue increases.

Interestingly you see a similar dynamic among strong businesses with pricing power in other high-yielding sectors.

If you look at consumer staples, supply chain distributions, natural disasters and other factors leading to inflation have already pushed up costs. However, unfortunately for consumers, most of the large retailers have the ability to pass on these price rises to us all.

Many of our team members have also worked through various inflationary cycles. And, as contentious as it may be, we've actually seen many businesses improve their margins during inflationary environments.

So, while inflation is bad news for unprofitable tech and companies without pricing power, for many of the strong dividend payers in Australia it's not all doom and gloom.

MF: National Australia Bank Ltd (ASX: NAB) is one of your biggest holdings. Why is that?

PG: NAB is our preferred bank at the moment. It's coming up to its ex-dividend date, which happens at the end of May. It's also had pretty decent performance recently in terms of its business momentum. NAB is growing its loan book better than many of the other banks.

Commonwealth Bank of Australia (ASX: CBA) is also doing really well in that regard. But it's fairly expensive at the moment, whereas NAB is still on the cheaper side.

MF: What are your expectations around NAB for the year ahead?

PG: Their margins will probably be under a little pressure compared to where they have been, as has happened with all the major banks. But as interest rates start to increase, that should improve their net interest margin going forward. The RBA hasn't moved on interest rates yet, but we do expect that in the second half of this year.

MF: How does the potential negative impact of rising interest rates on the banks' mortgage books factor into that?

PG: We don't see an increase in the interest rate of 1% as causing any significant impact on bad debts. If interest rates were to increase by 3% or 4% then that's where you'd start to see the Australian borrower begin to struggle. But based on all the statistics that we see, people have a lot of money in their offset accounts. So, we wouldn't expect any significant defaults. Especially in the early stage of the rate increases.

If inflation doesn't get under control and the RBA is forced to ratchet up interest rate increases, then that's something that could be an issue in the long term. But we don't see that as a short to mid-term issue.

MF: If the market closed tomorrow for four years, which ASX income stock would you want to hold? 

PG: That's a difficult question for a manager as active as Plato! While we often hear about stock to hold for a lifetime and the like, investors often forget how much can change in a matter of years.

In the current portfolio of the Plato Australian Shares Income Fund, we'd be relatively comfortable with our holdings in Macquarie Group Ltd (ASX: MQG) and JB Hi-Fi Ltd (ASX: JBH).


Tune in tomorrow for part 2 of our interview, where Plato Investment's Peter Gardner reveals his two favourite ASX dividend shares.

(You can find out more about the Plato Australian Shares Income Fund here.)

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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