There aren’t many shares on the ASX that I think make excellent dividend shares.
Having a high dividend yield is usually a result of a company having a high dividend payout ratio and / or it’s trading on a low price/earnings ratio multiple.
A high dividend payout ratio means that business is keeping less money to re-invest for profit growth. A low p/e ratio means the market doesn’t think much of the company’s earnings for whatever reason.
However, there are a few listed investment companies (LICs) that I think are worth considering for their high dividend yields.
One of my favourites is WAM Research Limited (ASX: WAX), that’s why I hold it in my portfolio. It’s run by the high-performing team at Wilson Asset Management, which also runs WAM Capital Limited (ASX: WAM), WAM Leaders Ltd (ASX: WLE) and other options.
Here are the three good things to consider about WAM Research:
WAM Research currently has a grossed-up dividend yield of 8.8%. Not only is the yield impressive, but WAM Research has increased is dividend every year since the GFC. There are very, very few shares on the ASX that have a high dividend yield and a history of increases.
Payout ratio / Profit reserve
One of the best ways to judge how risky a dividend yield of a share is, is to consider how much of its profit it pays out each year. Now it’s true that LICs do pay out a lot of the profit as a dividend each year. LICs can take the capital gains it makes and the dividends it receives and pay out a reliable dividend to shareholders.
However, WAM Research also has one of the biggest profit reserves in the LIC industry from past investment returns. It has three years’ worth of profit reserve to continue paying the same level of dividends. This means that unless there’s a market crash, WAM Research can continue paying its big dividend.
The key way to judge if a dividend share is worth owning is considering the strength of the underlying business. There’s no point getting an 8% dividend yield and then losing 20% on the value of your shares if it’s a risky business.
WAM Research has performed very well by focusing on the quality of the underlying businesses it invests in, finding value and only buying when the team see a catalyst that could increase the valuation.
Over the past year the portfolio has grown by 16.2% before fees. Over the past five years its portfolio has grown by 18.5% per annum before fees. This is a high standard of performance.
I think the dividend will be sustainable over the longer-term because the investment team have a knack for finding the next group of shares to invest in.
The high levels of cash provide protection against downside risk and also provide ammo for opportunities. Although WAM Research is trading at a significant premium to its NTA I think it’s a quality dividend pick due to the total returns on offer.
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Motley Fool contributor Tristan Harrison owns shares of WAM Research Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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.