It’s hard to know where to invest at the moment, but ASX listed investment companies (LICs) could be an option for income.
Low interest rates have pushed up the valuations of blue chips and ‘bond proxies’ like Transurban Group (ASX: TCL). Big bank dividends don’t seem reliable any more with a cut from Westpac Banking Corp (ASX: WBC) being the latest setback.
An exchange-traded fund (ETF) like Vanguard Australian Share ETF (ASX: VAS) might be an income option, but it just passes through the income it receives. So ASX ETF investors will likely indirectly suffer from the Westpac and National Australia Bank Ltd (ASX: NAB) dividend cuts.
But with LICs we have the potential to buy them at a 10% or more discount to their net assets, which also boost the dividend yield we’re buying them at.
Here are three ideas:
WAM Global Limited (ASX: WGB)
WAM Global is run by the Wilson Asset Management team, it’s aiming to be the global shares version of WAM Capital Limited (ASX: WAM), which has been running for two decades and has a grossed-up dividend yield of 10%.
I think there are many more opportunities in places like North America, Europe and Asia than on the ASX, so WAM Global could be a good way to get targeted exposure to those undervalued growth opportunities.
It’s trading at a 12% discount to the net tangible assets (NTA) at 30 September 2019 and over time I’m sure the dividend yield will steadily grow to a similar yield level as the newer WAM LICs.
NAOS Small Cap Opportunities Company Ltd (ASX: NSC)
This LIC is run by Naos, which is a firm that focuses on small caps. Naos generally only holds ten or so positions in each portfolio, so they’re high-conviction long-term picks. Naos aims to pay a sustainable, growing dividend to investors over time.
FY19 was a rough year but FY20 is more promising for some of its top holdings as industrial small caps come back into popularity.
Unless the market crashes it seems there is a dividend floor for this Naos LIC of 4 cents per share, which equates to a current grossed-up dividend yield of 7.7%.
Looking at the NTA, shares are currently trading at a 17% discount to the figure disclosed at the end of September 2019.
Contrarian Value Fund Ltd (ASX: CVF)
As the name might suggest, this LIC aims to be contrarian compared to the market and most stock pickers. It’s operated by Arowana and looks to invest in both ASX shares and overseas shares.
Based on the NTA on 28 October 2019, it’s trading at a 16% discount and the LIC has just commenced a monthly dividend which will amount to an annualised 5.5 cents per share, which is a grossed-up yield of 8%.
The LIC likes to hold a lot of cash for protection and opportunities.
Each of these LICs offers a compelling discount and interesting income potential. At the current prices I’d probably go for WAM Global because of its diverse portfolio and how many opportunities are available to invest in.
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Motley Fool contributor Tristan Harrison owns shares of NAO SMLCAP FPO and WAMGLOBAL FPO. The Motley Fool Australia owns shares of and has recommended Transurban Group. The Motley Fool Australia owns shares of National Australia Bank 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.