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Is the AFIC share price and dividend safe from market crashes?

I think it’s worth considering whether the Australian Foundation Investment Co.Ltd. (ASX: AFI) (AFIC) share price and dividend is safe from market crashes.

AFIC is one of the oldest listed investment companies (LICs) on the ASX, it’s been going since 1928! Straight away you can see that you’re not investing in some hot fad stock, this one has long-term longevity.

AFIC aims to provide shareholders with attractive investment returns through access to a growing stream of fully franked dividends and enhancement of capital invested over the medium to long term.

It provides a very low-cost way of investing in the ASX with an annual management fee of only 0.14% and no performance fees – that leaves more net returns for shareholders.

Over the past two decades it has done very well out of holding Australian blue chips like Commonwealth Bank of Australia (ASX: CBA), Wesfarmers Ltd (ASX: WES) and BHP Billiton Limited (ASX: BHP).

It has been the strength of its holdings and the Australian economy that has allowed AFIC to maintain or grow its dividend each year over the past two decades.

Is AFIC a safe haven?

Since its recent high after reporting season, AFIC’s share price has only fallen by 7%. Most other ASX shares have seen their share prices fall by mid-teen falls if not more.

For current AFIC shareholders, it seems like AFIC is indeed a safe haven – your shares haven’t dropped as much as the market. Its pre-tax net tangible assets have fallen by 9.5% since the end of August, which is also a fairly mild fall.

So, does that mean AFIC is a buy?

If you don’t like volatility of share prices or dividends then AFIC could be one to consider.

However, based on the pre-tax NTA of $5.70 at the end of November it’s trading at a 3.7% premium. If you look at the post-tax NTA of $4.97 it’s trading at a 19% premium. To me, it would only make sense to buy shares if it were delivering a market-beating return.

But, not only are its holdings quite similar to the index, Baillieu Holst Research calculated that its NTA has only delivered an average annualised return of 3.9% over the past five years.

AFIC is also paying out all (if not more) of its earnings as a dividend each year, which leaves nothing for re-investing. This approach relies on its underlying holdings to deliver the growth, which the big banks aren’t delivering. That’s why AFIC’s dividend hasn’t changed in three years.

If safety is your goal then it might be better to hold a lot of cash and go for growth with your shares.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers 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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