Is this share’s 9% yield too big to ignore?

Credit: Simon Cunningham

There are few shares on the ASX that have a larger dividend yield than WAM Capital Limited’s (ASX: WAM) grossed-up yield of 9%.

WAM Capital is a listed investment company (LIC) that has been operating since 1999. It was set up by illustrious investor Geoff Wilson and is operated by the high-performing Wilson Asset Management.

Since inception in August 1999 its portfolio’s gross performance has been an average of 17.5% per annum before fees and expenses. That equates to outperforming the S&P/ASX All Ordinaries Accumulation Index by 9% per annum.

Whether you look at the past year, three years, five years or 10 years its average gross performance has returned at least 14.5% per year. It manages to achieve good returns by focusing on small caps or mid-caps that are seen as undervalued growth companies.

It could also be described as somewhat defensive because of its large cash position. It tends to keep at least 25% of the portfolio as cash. This is good for protection and also provides ammunition for opportunities.

Unless the WAM Capital investment team can see a catalyst that will boost the valuation of a share the team are happy to sit in cash.

One of the best things about WAM Capital is that it aims to steadily increase the dividend for shareholders. It has increased its dividend every year since the GFC and may be able to keep doing so for the foreseeable future unless there is another major recession.

Foolish takeaway

It’s currently trading at a 19% premium to the pre-tax NTA at the end of September 2018. However, the recent fall in the share market could mean it’s trading at an even bigger premium.

For now, I’d wait until WAM Capital is trading at a better premium before taking the plunge. However, income-seekers would still be getting a 9% dividend yield if they bought today.

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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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