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Is WAM Capital Limited (ASX:WAM) the best LIC on the ASX?

WAM Capital Limited (ASX: WAM) is one of the older LICs on the ASX, is it one of the best?

Listed investment companies (LICs) are businesses which just invest into other businesses on behalf of shareholders.

Although WAM Capital hasn’t been going for over 50 years like Australian Foundation Investment Co. Ltd. (ASX: AFI) or Whitefield Limited (ASX: WHF), it has been operating for nearly 20 years.

Considering some of the classic dividend shares like Telstra Corporation Ltd (ASX: TLS) aren’t being reliable these days I think it’s worth considering if WAM Capital is a key LIC dividend pick.

Management

WAM Capital is operated by Wilson Asset Management, one of the most well-known managers in Australia.

Headed by Geoff Wilson, WAM has experience running a variety of other LICs including WAM Research Limited (ASX: WAX) and WAM Microcap Limited (ASX: WMI).

Performance

One of the key attributes that an investment manager brings is its long-term performance.

Since inception WAM Capital’s portfolio has returned an average of 17.5% per annum before fees and expenses. If you’ve been an investor since 1999 then you’ve done very well!

The performance has also been strong over shorter timeframes. Over the past ten years and five years its portfolio averaged 16.1% and 14.5% respectively, before fees and expenses.

I am impressed that WAM Capital manages to return a mid-teen return on average every year, including the past year, whilst also holding a comfortable level of cash.

Fees

One of the key gripes against all non-passive investment funds is the fees. WAM Capital charges a 1% annual management fee and also 20% of the outperformance of the S&P/ASX All Ordinaries Accumulatio Index, if it outperforms.

Whilst the fees do take a bite out of the total returns, if the net return after fees still beats the index then it is worth the fees.

Dividends

WAM Capital is happy to pay out a large and growing dividend to shareholders if it has the profit reserve to do so.

It currently has a grossed-up dividend yield of 9.4%. It has increased its dividend every year since the GFC thanks to its strong investment performance.

Is it a good buy?

Out of all the shares on the ASX, it has one of the best dividend records with how large the yield is and how consistently it keeps growing the dividend. I do think it’s one of the best LICs on the ASX, perhaps behind a couple of its WAM peers.

However, a key consideration for investing in LICs is the discount or premium to the underlying assets.

WAM Capital is currently trading at $2.36, yet its last reported net tangible assets (NTA) for September 2018 was $2.06. Whilst the NTA has likely changed down a little due to the market falling, it’s fair to say that WAM Capital is trading on a sizeable double-digit premium.

Over the long-term it would probably be a good dividend buy at the current price, but the total returns may be hampered if the premium narrows. I would only personally consider investing in WAM Capital if the grossed-up dividend yield was 10% or more.

For now, it could be a better idea to buy this leading dividend stock, its dividend grew by 20% in FY18 alone.

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Motley Fool contributor Tristan Harrison owns shares of WAM MICRO FPO. The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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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