I think listed investment companies (LICs) solve three issues that many investors struggle with:
- Income – Many of the companies that offer high dividend yields are riskier and offer little growth compared to a typical mid-cap ASX business that would be a better investment choice but have lower dividend yield.
- Diversification – A lot of regular investors don't have the right diversification for their portfolios. LICs are run by investment professionals, if you pick the right LIC then you could end up very good diversification within your LIC choices.
- Portfolio regeneration – I think it can be a problem to hold the wrong shares for many years. Some shares are good to hold at some points of a cycle, a fund manager can change their LIC's holdings when needed.
With that in mind, here are three LICs with grossed-up yields above 8%:
Clime Capital Limited (ASX: CAM)
Clime is a small LIC that looks to give shareholders strong risk-adjusted total returns over the long-term. It takes an interesting approach by investing in small caps, medium caps and large caps on the ASX whilst also picking international shares.
During FY18 its portfolio generated a 12.9% return net of fees whilst keeping a decent amount of the portfolio as cash. Clime has steadily increased the dividend over the past five years and currently has a grossed-up yield of 8.1%.
WAM Research Limited (ASX: WAX)
WAM Research is my favourite ASX-focused WAM LIC. It purely looks at the quality of the businesses when looking for undervalued growth companies, it doesn't look for value arbitrage like something trading at a discount to the NTA per share.
Over the last five years its portfolio has returned an average of 18.8% per annum before fees which it uses to pay a solid dividend. It doesn't rely on having one big year, it generates consistent performance whilst keeping a high level of cash.
It has increased its dividend every year since the GFC and currently has a grossed-up yield of 8.8%.
Naos Emerging Opportunities Company Ltd (ASX: NCC)
Warren Buffett and many share experts acknowledge that it's harder to generate outperformance the larger the shares you pick. That's why this Naos LIC is so attractive to me – it looks at shares with market capitalisations under $250 million.
There will be some years of underperformance because Naos takes a medium-term investment approach with a high-conviction portfolio of around 10 to 15 shares. Over the past five years the portfolio has delivered an average return of nearly 15% per annum.
It has paid an increasing dividend since the second half of FY13 and currently has a grossed-up yield of 8.5%.
Foolish takeaway
All three shares have very nice yields and income-seekers would do well choosing them. However, WAM Research would be my first pick despite the premium to the NTA because it has the largest dividend yield and has generated the best performance. It could also be the 'safest' because of the high levels of cash in the portfolio.
