Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 679

Not all income is created equal

Australian investors have traditionally relied on two primary sources of income: dividend-paying shares and bank hybrids. More recently, private credit supplemented these income sources.

Each offered a compelling proposition. Equities and bank hybrids delivered attractive post-tax income and private credit offered an illiquidity premium in exchange for locking capital away.

However, the market has changed.

Investors can now access yield from high-quality Australian public credit that in many cases exceeds yields available from fully franked Australian equities. Public credit also sits higher in the capital structure, benefits from contractual income streams, and can be accessed through vehicles offering daily liquidity. Yields on private credit, by contrast, have steadily declined as demand for the asset class has increased.

Yields exceeding 6% are currently available to investors from a broad range of high-quality companies in public credit, an asset class that is liquid, highly regulated and has daily independent pricing transparency. Investors no longer need to accept the additional risks embedded in private credit, or the lower income yield now on offer from equities.

The decline of franked dividend income

Since 2010, the ASX200 has provided investors with a grossed-up dividend yield of between 4%-5% along with capital appreciation, with the exception of 2021 (2.75%), when COVID highlighted the discretionary nature of dividends (see chart 1). However, since 2022, the rally in equity markets has outpaced dividend growth, which has resulted in the dividend yield dropping to 3.3%. Up to this point, investors have been rewarded through capital gains, but for the incremental investment dollar, the ASX200 is offering a lower income yield and/or a greater risk of capital loss if the index yield returns to the 4-5% range.

Chart 1: Australian Credit versus Equity Income

Source: Bloomberg, July 2026

More recently, public credit and equity income yields have diverged. Higher underlying interest rates, together with wider credit spreads, have pushed yields higher, creating a situation where investors can access income streams that often exceed fully franked dividend yields. The chart below shows just a few examples where senior and subordinated yields on listed companies exceed the franked equity dividend yield. 

Chart 2: Comparing yields across the capital structure

Source: Bloomberg, July 2026

This matters because dividends are discretionary, whereas bond coupon payments are a legally binding obligation, subject to the terms of the security and the issuer remaining solvent. Dividends can be increased, reduced or cancelled altogether depending on company profitability, economic conditions, capital requirements, and/or management decisions. This is not the case for bonds.

Furthermore, bondholders must be paid before shareholders. They sit higher in the capital structure and enjoy a priority claim on a company's cash flow.

Whilst equities remain a good source of long-term capital growth, high-quality public credit can offer income-focused investors greater contractual certainty and a higher position in the capital structure, with yields that in many cases now exceed grossed-up dividend yields.

The value of liquidity

Over the past decade, achieving higher yields has often meant investors have accepted lower liquidity and lower quality by investing in Australian private credit funds. Post the Global Financial Crisis (GFC), when interest rates were near zero and income was scarce, that trade-off looked attractive.

Today, it is less compelling.

Public credit yields are now comparable with private credit, but without the lock-ups, high fees, valuation opacity and constrained liquidity that define many private market investments. This is particularly important because liquidity is often underestimated until it is needed. Opportunities emerge. Personal circumstances change. Markets move.

As a regulated, liquid asset class, public credit gives investors the ability to respond, private credit does not.

At the same time, investors should be cautious about equating smoother returns with lower risk. The apparent stability of private credit is partly a function of infrequent pricing. Assets that are not regularly traded naturally experience less visible volatility. That does not mean the underlying risks have disappeared. In fact, risk can be exacerbated by the lack of transparency inherent in these markets.

Income should be contractual, not conditional

Perhaps the strongest argument for public credit is the nature of the income itself.

Income investors are often seeking reliability as much as yield. The ability to plan around regular, predictable cash flows is a central part of the investment objective.

Public credit is built around contractual income payments. The amount, timing and frequency of coupon payments are established when the bond is issued.

That certainty stands in contrast to both equities and parts of the private credit market.

Dividend payments depend on company performance and board decisions.

Private credit investments can also include complex documentation features that allow borrowers to defer cash interest payments under certain conditions.

Public investment grade bonds generally offer a much simpler proposition: the borrower is expected to pay investors in cash and on time.

In an environment characterised by greater economic uncertainty, that certainty has value.

Why quality matters

Income should not be evaluated solely on yield. The quality of the borrower matters.

The strength of the Australian public credit market is that it remains dominated by investment-grade issuers, including major financial institutions, infrastructure businesses, utilities and other established corporate borrowers like Woolworths and Wesfarmers.

In Australia, these companies operate in a favourable competitive environment, often enjoying a monopoly or duopolistic position. Many operate essential services, generating resilient CPI-linked cash flows and are also required to maintain regulated and transparent reporting standards.

The combination of high yields, quality and seniority within the capital structure is difficult to replicate elsewhere.

A better income proposition

For much of the past decade, income investors faced an uncomfortable choice: accept lower yields from defensive assets, or chase higher yields by sacrificing liquidity, transparency or credit quality.

Today, investors no longer need to accept that trade-off.

Australian public credit offers a competitive income solution with the benefit of high-quality exposures, contractual cash flows, transparent pricing and daily liquidity.

In our view, public credit is no longer just the defensive option. For investors focused on income, it now stands out as one of the more compelling opportunities available.

 

Helen Mason is Head of Credit, Australia at Schroders Investment Management Australia, a sponsor of Firstlinks. Issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473). This article does not contain and should not be taken as containing any financial product advice or financial product recommendations. This article does not take into consideration any recipient’s objectives, financial situation or needs. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this material.

For more articles and papers from Schroders, click here.

 

  •   9 September 2026
  • 5
  •      
  •   
5 Comments
Dave Roberts
September 13, 2026

I agree Keith. Could Helen please tell us how and where to search.

Rob Smith
September 10, 2026

Great article Helen. Lots of insightful information and food for thought.

Bert James
September 13, 2026

Public credit yields over 6% are way lower than Private credit returns. My returns currently in excess of 8.5%. I invest in individual investments held with 1st mortgage guarantees. I acknowledge they are not as liquid but being able to lock in rates for periods up to 2 years more than compensates. All it takes is planning to defuse any liquidity issues. I use it as Pension drawings from my SMSF combined with dividends from my ETF’s.

Roger Ng
September 13, 2026

I invest 7.50% of my assets in zero yielding illiquid startups. I've built up a portfolio of 12 investments so far. On paper they are now valued at 70 times my initial investment with two planning liquidity events in the next 12 months. No losses yet but I expect there will be given the very high risk nature of this sector. However, the two upcoming liquidity events will ensure a quadrupling of my asset base. The other 92.5% of my assets yield between 7-10% - with an average of 8.2% over the last 4 years - and are mainly in long dated hybrids, ETFs and a few tearaway biotech equities. The old adage of Risk/Reward should not be forgotten.

 

Leave a Comment:

     

RELATED ARTICLES

The best income-generating assets for your portfolio

Can you value a share just using dividends?

The long-term case for compounders

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Latest Updates

Fixed interest

Higher yields are creating opportunities in global bonds

Bond markets are adjusting to a new reality, but not in the ways investors expect. With markets repricing and capital competing for attention, investors may need to rethink where resilience and opportunity lie. 

Economy

Are we in a recession?

What if the warning signs are already everywhere? From supermarket aisles to company failures, investors are being bombarded with recession signals. But most face a different risk that can be just as dangerous for portfolios. 

SMSF strategies

Meg on SMSFs - Division 296 actuarial certificates

The tax bill might be yours, but the event that caused it may not be. A key Division 296 calculation can sometimes attribute earnings in ways that many SMSF trustees won't instinctively expect or fully appreciate.

Property

The first impact of negative gearing reform is not the tax bill

Negative gearing changes formally begin in 2027, but the first consequences may already be here. A subtle shift is quietly influencing who can borrow, how much they can access and which property strategies still stack up.

Economy

The oil market is running out of easy answers

The biggest threat to markets may not be what investors are watching. The numbers have stopped adding up and supply is harder to measure, with forecasts becoming simple guesses. A more fragile reality is being masked.

Investment strategies

The state of investor knowledge in Australia

Australians are investing more than ever, yet a surprising divide is emerging between those building wealth effectively and those making costly mistakes. Surprisingly, the gap has little to do with income, age or starting capital.

Taxation

Complexity and capital gains

A case study shows that the ‘30% minimum CGT’ is a poorly conceived tax that adds significant complexity to an already over-complex system. A less complicated model would create a much fairer progressive tax scale.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.