Australian Foundation Investment Co. Ltd. (ASX: AFI) (AFIC) is the largest listed investment company (LIC) in Australia. It has been operating since 1928 and has been paying dividends for a very long time too.
AFIC isn't for every investor, but I think it's worth a place in most portfolios, particularly for younger investors or people with little time to study the share market.
Here are three reasons why I think AFIC would make a good investment:
Diversification
The sole purpose of AFIC is to invest in other companies for the benefit of shareholders.
The largest holdings of AFIC's portfolio closely match the index of Australia's largest companies. The biggest five of AFIC's holdings are: Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), BHP Billiton Limited (ASX: BHP), National Australia Bank Ltd. (ASX: NAB) and Wesfarmers Ltd (ASX: WES).
An investor would have to spend a lot on brokerage to recreate that diversification in their portfolio.
The diversification also means that there is a lot less capital risk for investors if any business runs into trouble.
No key personnel risk
Some of the best investment companies out there are run by very talented individuals. Warren Buffett is key to Berkshire Hathaway's success and Geoff Wilson has done a great job with WAM Capital Limited (ASX: WAM).
AFIC has been operating for many decades without needing any particular individual. Having the confidence that you can invest in the business without worrying when someone is going to retire is important.
I expect AFIC will be operating for a long time after you or I have checked our portfolios for the last time.
Dividends
Australian businesses are known for their generous dividends and AFIC is no exception. AFIC has maintained or grown its dividend every year for at least two decades, even through the GFC. This gives shareholders confidence that they can rely on a strong dividend from AFIC every year.
AFIC is currently trading with a grossed-up dividend yield of 5.93%.
Risks
AFIC itself may be a solid investment but it relies on its underlying investments to do well. If the overall Australian economy doesn't do well then AFIC will find it hard to deliver exceptional returns over the next few years.
A large portion of AFIC's portfolio is exposed to loans on properties. Australian debt levels continue to break unwanted records, so if the banks in-particular run into trouble, then AFIC is exposed to this.
Foolish takeaway
AFIC, Australian United Investment Company Ltd (ASX: AUI) and Whitefield Limited (ASX: WHF) are my three favourite LICs that focus on the large cap stocks on the ASX. I think they are all worthy of an investment instead of directly investing in the biggest 10 ASX-listed businesses.
