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Is this the best dividend share on the ASX?

Australian Foundation Investment Co. Ltd. (ASX: AFI) is a listed investment company (LIC) that has been operating since 1928 and has been investing for the long-term on behalf of shareholders ever since.

Here some reasons why it may and may not be the best dividend share:

The best

It has been one of the most consistent dividend shares on the ASX over the past two decades. Since 2000 it has increased or maintained its dividend every single year during that time including through the GFC. This is very reassuring for people like retirees.

A lot of index funds have costs that are at least 1% of NTA per year, whilst AFIC’s is a very low 0.14% per annum and there are no performance fees.

It currently has a grossed-up dividend yield of 5.5%, soundly offering more income than what you can get in the bank.

Not the best

Whilst the income has been consistent it hasn’t grown since FY16. This means investors relying on the income have been losing to inflation in the last couple of years.

Not only that, but in the last three years its dividend payout of 24 cents has been higher than its earnings per share (EPS) in FY18, FY17 and FY16.

Its NTA plus dividends total return has underperformed the S&P/ASX 200 Accumulation Index by 1.7% over the past year, 1.7% per annum over the past five years and 0.2% per annum over the past decade according to today’s market update.

AFIC’s long-term performance will be dictated by its underlying holdings. I’m personally not a fan of most of its top holdings like Commonwealth Bank of Australia (ASX: CBA), BHP Billiton Limited (ASX: BHP) and Westpac Banking Corp (ASX: WBC). I think they offer little growth and poor pricing power.

Foolish takeaway

Ultimately, I think AFIC has great staying power, a very attractive low management fee and a reassuring dividend. However, its holdings are letting it down and it may continue to generate poor longer-term returns whilst most of its portfolio is allocated to slow-growers.

It’s a better investment choice than quite a few shares out there, but it’s not for me or my portfolio.

I think this top ASX share offers more defensive characteristics than AFIC and also offers better capital growth and a fast-growing dividend.

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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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