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3 reasons why this share’s 8.5% yield is attractive

In this current environment of low interest rates it’s very hard to find a good source of attractive income except for shares.

Bank interest rates are woeful and term deposits are little better. Residential properties probably offer negative cash returns with the current low gross yields. Bonds and commercial property also don’t look like good ideas with US interest rates rising.

I think the only source of income that’s worth looking at is shares, particularly once you add on franking credits.

One of the best sources of income in my opinion is Naos Emerging Opportunities Company Ltd (ASX: NCC), a listed investment company (LIC) run by Naos Asset Management. This is the LIC that has been in the Naos stable the longest and focuses on shares that have market capitalisations under $250 million.

The LIC currently has a grossed-up dividend yield of 8.5%. However, it’s not just the size of the dividend that makes it attractive:

Outperformance

Since inception that Naos Emerging Opportunities portfolio has returned an average of 15.39% per annum after expenses, but before fees. This performance has beaten the S&P/ASX Small Ordinaries Accumulation Index by 8.69% per annum. Small caps give the best chance of creating strong performance.

If Naos can continue this level of outperformance over the long-term then the dividend can continue to grow at an attractive pace, whilst the capital value of the shares will also grow nicely as well over time.

Growth of the dividend

One of this LIC’s main aims is to pay a growing fully franked dividend to shareholders. It has been very successful in this regard – the dividend has grown each year since it started paying a dividend in the second half of FY13.

I imagine it will be able to keep growing the dividend in most scenarios considering it already has a decent profit reserve. The main risk to the dividend would be a recession, which usually hurts small caps more than most.

Value

Whilst some LICs out there are trading at significant premiums to their net tangible assets (NTA) per share, Naos is trading at close to its NTA, which means it looks better value on a conventional valuation. It also means that the yield is higher than if the LIC were trading a significant premium to the NTA.

Foolish takeaway

I’d be happy to buy some shares at today’s price and add more shares if it traded at a decent discount to the NTA in the future or if the small cap section of the market was sold off.

Another top dividend share is this top ASX stock which grew its dividend by more than 25% in its latest report and there could be more big growth of the dividend to come!

Breaking news: ASX companies set to raise dividends!

It's been a nail-biter of a reporting season here in the first half of 2018.

But the real action, in my opinion, is what companies are doing with dividends.

What does this mean for you? Well there is one stock I've found that could very well turn out to be THE best buy of 2018. And while there's no such thing as a 'sure thing' when it comes to investing - this ripper might come as close as I've ever seen.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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.

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