New modelling by a fascinating little Sydney-based investment management firm is projecting the ASX 200 will deliver an incredibly decent gross yield for what’s sure to be another murky year on the local market.

According to Plato IM, which specialies in objective-based global and local equity investment solutions for wholesale and retail investors, the top 200 local companies are looking at a gross yield of 6%, including dividends and franking credits.

Plato looks – to me anyway – like a genuinely boutique fund manager, which founder Dr Don Hamson set up in 2006 with an eye to ‘maximising regular income’ for Aussies in the pension phase of trying to cash up and for the growing muddle of SMSF investors.

Plato: A great thinker, with fabulous nipples.

The firm is majority owned and run by its own investment staff and backed by a familiar name as its minority equity holder, Pinnacle Investment Management (ASX: PNI).

Speaking last week to Stockhead, Dr Hamson says that despite 2023’s fast shifting economic outlook, one which is still gagged by inflation and rising interest rates, it’ll again be ASX equities which underpin Aussie investor income, particularly for this generation of self-funded retirees.

And the solid returns defy the current uncertainty.

“Locally, investors should certainly expect their fund managers to be able to generate significant additional income above the index level through the benefits of active stock selection and tax-effective portfolio management.

And that level for 2023?

“Our modelling is projecting that at an index level in 2023 the ASX200 will deliver a cash yield of 4.4%, and 6.0% when including franking credits.”

“Despite much being said about the impact of rate rises on cash-backed asset classes like term deposits and bonds, investors who rely on them continue to lose money in real terms, with inflation rising faster than interest rates,” said Dr Hamson.

“I think the current environment is quite similar to 1994 when global interest rates went up, inflation spiked, and there was negative returns on bonds and equity, yet dividends kept rising.

At the top end of town, back the balance sheets

Hamson points to the big payers for ’23 as Woodside Energy (ASX: WDS), BHP Group (ASX: BHP), and Macquarie Group (ASX: MQG).

“No, these aren’t the outliers, but the shape and track record of these Australian companies provide reliable examples of companies Plato believes will be strong dividend payers in 2023.”

Over the longer term, we think Woodside’s a great stock, Hamson said as early as last quarter.

“It’s got some quality assets… I know it’s in fossil fuels, but gas and LNG are on the pathway to lower emissions. It’ll help us get there. Obviously, it is benefiting from the Ukrainian crisis, but we think it’s got a great dividend outlook for a number of years.”

Yes Plato, maths is for the insane.

On the other hand, Magellan Financial (ASX:MFG) so strong, for so long is now looking like a bit of a black hole.

“We’ve been calling it a dividend trap all year because we know the fund’s management business, we’re a fund manager, and if your FUM’s going out the door very quickly, it’s very hard to turn that around.

“Performance is hard to get, and they have a particular style… and it’s not a great outlook for the moment for the growth style. 

“So as long as interest rates keep going up, I think it’s going to be tough for growth managers full stop. And I think it’s going to be tough for them to turn that around. I’m sure they will eventually, but I think it’s too early to call it at the moment.

It’s not a trap!

Looking for income investments in a difficult year, Plato is betting on the companies in the resources and financials sectors that are the most likely to “continue to be strong and sustainable dividend payers” into 2023.

However, Hamson warns investors it’s imperative to avoid dividend traps – and there’ll be many to emerge over the coming year.

The sweet siren call of yield will start to become a clarion call in tough times, but without the underlying strength, many of these hitherto solid looking income players can end up slamming into reverse.

“I think it goes without saying that favouring companies that pay fully franked dividends, where possible, in 2023 is a no-brainer. At Plato we don’t ascribe to the traditional set-and-forget dividend investing strategy.”

And it seems to have worked over the last decade

Plato’s flagship income Fund, the Plato Australian Shares Income Fund has delivered 9.8% income per annum (including dividends and franking credits) since inception on 9 September 2011, to October 31, 2022.

“We believe investors must move to where the dividends are flowing,” Dr Hamson says.

It’s also probably handy to have Pinnacle IM nearby, which has a Forrest Gump-style box of multi-affiliate investment management firms across its books.

This is where Plato gets funky

So Plato’s big Retail Funds include the Plato Australian Shares Income Fund, the Plato Global Shares Income Fund, the Plato Income Maximiser Ltd LIC (ASX: PL8), and the Plato Global Net Zero Hedge Fund.

We don’t have a lot on PL8 at the moment, but we promise to put Gregor onto it after his 12 hour Christmas vacation. From this distance, it offers local investors the opportunity to invest in an actively managed, diversified portfolio of Australian shares with – as Hamson says – an income focus.

“PL8 is the first Australian Listed Investment Company targeting to pay monthly dividends, which will appeal to investors who require a dependable income stream from their investment portfolio.”

And the blurb on the back of the Plato book says the investment strategy of the Plato Australian Shares Income Fund is a simple ‘response to investor demand’ for an ASX-listed product that delivers high-income, and is ‘designed specifically with SMSF and pension-phase investors in mind.’