At this share price, is Australian Foundation Investment Co.Ltd. (ASX: AFI) a great buy for the long-term?
AFIC is the largest listed investment company (LIC) on the ASX. The job of a LIC is to invest in other shares.
What are some of the shares that AFIC owns?
In order of size, AFIC’s biggest five holdings are: Commonwealth Bank of Australia (ASX: CBA), CSL Limited (ASX: CSL), BHP Group Ltd (ASX: BHP), Westpac Banking Corp (ASX: WBC) and Transurban Group (ASX: TCL).
It also owns shares with more of a growth focus like SEEK Limited (ASX: SEK) and Treasury Wine Estates Ltd (ASX: TWE).
One of the main reasons to like AFIC is for the dividend. We’re 20 years into this century and AFIC has maintained or grown the dividend every year so far. AFIC provides excellent income security. This is great for retirees.
AFIC currently has an ordinary grossed-up dividend yield of 4.7%. That’s pretty good for an investment that provides bond-like income.
The last year five years has been solid for AFIC, it has produced investment returns of an average of 10.1% per annum which includes fees, expenses and tax.
However, the disappointing thing is that the performance mentioned above was an underperformance of the ASX 200 Accumulation Index by an average of 1.5% per year. That doesn’t sound like much but it compounds to a sizeable difference over time. You may as well pick Betashares Australia 200 ETF (ASX: A200) which comes with lower costs.
Is the AFIC share price a buy?
AFIC is fine as an investment option, it’s just that it has underperformed the index in recent years, meaning that a passive exchange-traded fund (ETF) would have been a better option.
It can still be attractive to buy LICs if you can buy them at a material discount to their net tangible assets (NTA), but now that franking credit worries are over it seems that AFIC is back to trading at a premium again – which isn’t attractive in my opinion.
For dividends I would much rather put my money towards these reliable income stocks.
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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Transurban Group and Treasury Wine Estates Limited. The Motley Fool Australia has recommended SEEK 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.