Is AFIC a good stock?

A reader recently asked how can I think Australian Foundation Investment Co. Ltd (ASX: AFI) (AFIC) would be a good investment for my child, but then I say I wouldn’t buy it for my portfolio.

For a bit of background, AFIC is one of the oldest companies on the ASX having operated since 1928. It’s the largest listed investment company (LIC) on the ASX, its job is to invest into other shares on the ASX for the benefit of shareholders.

When I think about what would be good investments for my child I would want to choose shares that I can buy today that they could hold until they become an adult, which could be for 18+ years. AFIC has proven it can operate for a very long time and I imagine it will definitely be around in 20 years time, particularly because it can change its holdings to suit the economic climate. There is a much higher chance of an individual business becoming irrelevant in that time.

AFIC would also be a good investment to teach my child about diversification because of the many different holdings it has. When you compare AFIC to a lot of other investment products it has a very low management fee, currently around 0.16% per annum.

As a bonus, it has a pretty high grossed-up dividend yield of 5.7% and hasn’t decreased its dividend in the past 20 years, meaning it could be a decent option for retirees too.

I think AFIC is a pretty good share compared to a lot of other shares you could buy on the ASX. It’s a good choice for people who have no interest at all in shares and it would also be a good ‘starter’ share for someone to become familiar with investment concepts. If someone had held AFIC and re-invested the dividends over the past two decades they would have generated very satisfactory wealth.

However, a lot of AFIC’s portfolio resembles the ASX index. Some of its top holdings are slow-growth shares like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Group (ASX: WBC) and BHP Billiton Limited (ASX: BHP). Most of AFIC’s top holdings have already achieved a large industry market share, they are already country-dominating businesses.

I think investors who want to beat Australian index returns can identify quality businesses that are much more likely to generate stronger returns. Investors in their 20s and 30s (such as me) who take an active interest in shares have much longer investment timeframes and therefore can be patient for the investment thesis with a growth share to play out.

Foolish takeaway

As someone who does invest in individual shares I think there are a lot of options on the ASX to beat the Australian index, even if you just go for an overseas index like BETANASDAQ ETF UNITS (ASX: NDQ) which contains the world’s global tech shares like Apple and Amazon, these businesses are nowhere near done growing yet – some market analysts think they’re only just getting started.

AFIC is a good share for a lot of people’s circumstances, I just think there are even better options out there for my own portfolio.

Other growth ideas to try to beat the Australian index could be one of these top ASX growth stocks.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended BETANASDAQ ETF UNITS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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