Is the Australian Foundation Investment Co.Ltd. (ASX: AFI) share price a buy for income?
I can definitely understand if many investors are asking themselves that question with the RBA deciding to cut interest rates by another 0.25% to 1%. Where are people supposed to generate a decent income if interest rates are so low? I think shares on the ASX is the (only) answer.
One of the most popular ideas for income on the ASX is listed investment companies (LICs), their job is to invest in other shares or assets and pass through the gains to shareholders in the form of dividends.
AFIC is the biggest LIC on the ASX and also one of the oldest as it was established in 1928.
It had a $7.8 billion portfolio at 30 June 2019, with a lot of its money invested in some of Australia's largest blue chips such as Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), Westpac Banking Corp (ASX: WBC), CSL Limited (ASX: CSL), National Australia Bank Ltd (ASX: NAB), Transurban Group (ASX: TCL) and Australia and New Zealand Banking Group (ASX: ANZ).
It's this focus on the large businesses that has meant that AFIC has been very reliable over the past 20 years in terms of its dividends. The strength of the ASX has allowed AFIC to maintain or grow its dividend each year over the past two decades. It's this income consistency that means the AFIC share price is not very volatile either.
AFIC currently offers a grossed-up dividend yield of 5.4%, which is quite good in this era of interest rates. It's also attractively priced at a slight discount to its pre-tax net tangible assets (NTA) per share.
Foolish takeaway
However, the main reason why I'm not jumping to buy its shares is that its investment returns, including franking, have underperformed the S&P/ASX 200 Accumulation Index over the past year, five years and ten years. It has underperformed by 2% over the past year. Why not just buy into a low-cost ETF if AFIC continues to underperform?
