Naos Emerging Opportunities Company Ltd (ASX: NCC) is currently offering a grossed-up dividend yield of 9.2% based on the current share price of $1.12.
This seems like a very attractive starting dividend yield, particularly because one of the main Naos aims is to sustainably increase the dividend.
Naos Emerging Opportunities is a listed investment company (LIC) that aims to beat the S&P/ASX Small Ordinaries Accumulation Index by investing in ASX shares with market capitalisations under $250 million.
Many of Australia's best businesses like REA Group Limited (ASX: REA) started off as small businesses, so Naos has potentially fertile ground to hunt for opportunities.
The last two months have been pretty damaging for the Naos portfolio, which fell by over 6% in November 2018. However, that hopefully means that future returns are higher because the values are lower this month.
Since inception in February 2013, the Naos portfolio has returned an average of 13.2% per annum before fees but after expenses – this return has beat the Small Ordinaries Accumulation Index by an average of 8.4% per annum.
Naos invests for the long-term in industrial businesses that have medium-to-long-term growth potential. This should mean those companies generally don't have cyclical earnings.
However, no portfolio is guaranteed to do well over the short-term – particularly when you only hold around 10 high-conviction share ideas. The rising interest rate environment usually isn't good for small cap valuations in-particular.
Foolish takeaway
It's only over multi-year timeframes that long-term investment managers can prove their worth. This LIC may continue to suffer from volatility in the shorter-term, but with it trading at around its underlying value I think it's at a fair price.
If Naos can continue to sustainably grow the dividend then it could be a very good income pick. However, the dividend is only sustainable if there are profit reserves to pay the income, which requires positive investment returns.
