NAOS Small Cap Opportunities Company Ltd (ASX: NSC) may be offering investors a grossed-up dividend yield of more than 10%.
It’s currently trading at a share price of $0.74 and has just switched its dividend payments to a quarterly payout of 1.35 cents per share, equating to an annual payment of 5.4 cents – suggesting a grossed-up yield of 10.4%.
Most shares that trade with a grossed-up dividend yield of 10% or more are a yield trap. Just think of what happened with Telstra Corporation Ltd (ASX: TLS).
However, with Naos it could well be sustainable. Firstly, based on the October 2018 update it was trading at a discount of more than 12% to its underlying assets. If it was trading at its underlying value then the gross yield would be just over 9% – this sounds more sustainable.
Second, a key objective of Naos is to pay ‘sustainable growing stream of fully franked dividends’ and long-term capital growth.
If Naos is able to replicate the long-term performance of its other LICs then it could achieve mid-teen investment returns before fees over the long-term. Whilst NAOS Small Cap Opportunities Company invests in different shares to NAOS Ex-50 Opportunities Company Ltd (ASX: NAC) and Naos Emerging Opportunities Company Ltd (ASX: NCC) the same effective strategy is used.
That strategy is to ignore the index, go for quality over quantity with only high-conviction choices, only invest in industrial businesses and invest for the long-term. It certainly ticks all the boxes for the right tactics to beat the market. What this translates to is a portfolio of around 10 quality shares.
Whilst it has a lower level of cash compared to some other LICs, its underlying holdings are in good shape. Naos said that only two holdings have net debt positions and it expects those to become net debt free within two years.
The investment team have focused on shares that have identifiable tailwinds which are not tied closely to global developments and volatility.
Of course, Naos will have to generate decent returns to maintain that dividend yield over the next few years.
Naos has slightly higher management fees than the typical LIC, but over the long-term it could generate better net returns, which is what we should all be after as investors. If you’re a dividend investor then this Naos LIC could be a good pick for part of your portfolio for a long-term investment.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended MNF Group Limited and 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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