Is the WAM Capital Limited (ASX: WAM) share price a buy for its grossed-up dividend yield of 10%? It could be.
WAM Capital is a listed investment company (LIC) that is managed by the high-performing team at Wilson Asset Management.
In my opinion, it is the best LIC to own that was created last century because of its high gross returns and its big dividend yield. The company structure allows WAM Capital to generate returns from capital growth and dividends received, and then pay shareholders a steadily rising dividend from the gains.
Since inception in August 1999 the WAM Capital portfolio has delivered an average return of 16.4% before fees and expenses, which has outperformed the S&P/ASX All Ordinaries Accumulation Index by an average of 8.6% per annum.
FY19 has been tough for nearly all investors, including the WAM Capital portfolio which has seen a 9.3% fall since the start of July 2018. That's partly why the trailing dividend yield has grown to over 10%, despite the premium to the underlying assets still sitting at around 25%.
WAM Capital has increased its dividend every year since the GFC. If it is able to keep increasing the dividend from here, even at 1% per annum in the short-term, it looks like an excellent idea for dividend income.
However, the dividend can only be paid from previously-generated investment returns. If WAM Capital burns through its profit reserve it won't be able to pay such a big dividend, which is what happened during the GFC.
At the end of December 2018, the WAM Capital portfolio had 43.9% of its assets as cash. This should provide good protection to further market falls and may provide excellent ammunition for buying beaten-down opportunities.
Foolish takeaway
Whilst WAM Capital does seem to offer a very high dividend yield I think I'd rather go for WAM Research Limited (ASX: WAX), which has a higher profit reserve. But, both of them are trading expensively compared to their underlying assets.
