Dividends are one of the most pleasing aspects about investing in shares. It’s so satisfying to do no work for the companies you own, yet receive a dividend every six months.
Not only that, but the income on offer from many ASX shares is a lot higher than you could possibly get from all the various bank accounts that are out there. Even the best ones only offer an interest rate of around 2.8% to 3%.
The difficulty about finding high-yielding dividend shares is that the yield is a combination of the valuation of the share and its payout ratio. If a share is trading expensively its yield is automatically lower compared to less-expensive shares. Plus, a company with a higher payout ratio will likely have a better yield, that doesn’t make them better choices.
Therefore, it becomes problematic trying to choose shares with big yields. Perhaps the low-valued share is actually much riskier, or there’s a big chance of a dividend cut such as Telstra Corporation Ltd (ASX: TLS). A high payout ratio means the company isn’t re-investing for future growth, which can also be applied to Telstra.
A good way to counter that could be listed investment companies (LICs) which have the capability of paying out dividends from its investment returns, which is a combination of capital growth and dividends. They can create good returns with growth shares and then pay a dividend out of that. Here are three examples of LICs with big yields:
WAM Research Limited (ASX: WAX) has a FY18 grossed-up dividend yield of 9% and has soundly beaten the market over the long-term by keeping a good amount of cash on hand for opportunities like undervalued growth companies. It has increased its dividend each year since the GFC.
Naos Emerging Opportunities Company Ltd (ASX: NCC) has a FY18 grossed-up dividend yield of 8.64% and has beaten the market by focusing on small caps with a good long-term opportunity of a time horizon of three (or more) years. It has increased its dividend each year since the second half of FY13.
Clime Capital Limited (ASX: CAM) has a FY18 grossed-up dividend yield of 8.3%, it has a diverse portfolio of large caps, medium caps, small caps and overseas shares. It has increased its dividend in each of the last five years.
All three of these LICs have impressive dividend records over the past five years and also have high yields. It’s hard to say if they can maintain the dividend during the next recession, but they all look like good dividend options to me, particularly WAM Research.
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Motley Fool contributor Tristan Harrison owns shares of WAM Research Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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.