A dividend share with a dividend yield of over 9% looks like a retiree’s dream.
Plenty of shares with big dividends have turned out to be yield traps. Just look at what happened to the dividends of Telstra Corporation Ltd (ASX: TLS), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC). All those dividends have been materially cut.
There are not many shares that continually offer a high yield for new investors. Eventually, either the dividend is cut or the share price rises to reduce the prospective yield.
Look at shares like Nick Scali Limited (ASX: NCK), Magellan Financial Group Ltd (ASX: MFG) and Dicker Data Ltd (ASX: DDR), the share price growth has been so strong that it has significantly reduced the upfront yield for new investors.
Step in, WAM Research Limited (ASX: WAX).
What is WAM Research?
It’s a listed investment company (LIC) that invests in undervalued growth companies on the ASX to deliver strong market returns whilst holding onto a healthy level of cash.
It is different to other WAM LICs in that it only focuses on the quality of the underlying business, rather than also trying to find some businesses that are trading at obvious discounts to their net assets.
What’s so good about the dividend?
WAM Research currently offers a grossed-up dividend yield of 9.2%, which is lot higher than many other recognised ‘dividend’ shares like Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD).
Not only is the current yield great, but it has grown its dividend every year since the GFC and it just increased it again by 1% in the half-year result.
How does it fund the dividend?
Normal operating businesses try to make a profit by selling products or services. LICs make profits by making investment returns on their share portfolio.
In the five years to December 2019, the WAM Research portfolio generated average returns per annum of 14% before expenses, fees and taxes, outperforming the S&P/ASX All Ordinaries Accumulated Index by 4.7% per annum. WAM Research pays its dividends out of the net investment returns.
What are some of its top holdings?
Why is it good for retirees?
In retirement, you don’t necessarily need to find the investments that offer the strongest capital growth any more. You can’t take your fortune to your grave, so WAM Research’s approach of paying out most of the gains each year could result in the right amount of short-term spending versus long-term capital preservation. However, it definitely isn’t cheap at the moment, it’s at an expensive premium to its net tangible assets (NTA) per share.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended BWX Limited, Dicker Data Limited, Sydney Airport Holdings Limited, Telstra Limited, and Transurban Group. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Brickworks and Service Stream 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.