When it comes to ASX dividend shares, there are few choices that can match WAM Capital Limited (ASX: WAM) right now for raw income potential.
WAM Capital isn't an ordinary ASX dividend share though. It's a listed investment company (LIC) that invests in mostly undervalued, mid-cap ASX shares with what WAM Capital calls a potential 'catalyst'. Once this catalyst has been realised by the market, WAM is normally inclined to sell the company. This strategy has worked very well for the LIC in the past. Since its inception in 1999, WAM Capital has returned an average of 15.7% per annum to its investors (before fees). A major part of these returns have come from the dividends WAM Capital has managed to dish out.
Since the global financial crisis in 2008, this LIC has managed to hold or increase its dividends every single year. On current prices, these are worth a 7.71% yield – or 11% grossed-up with full franking.
Can WAM Capital afford its 11% yield?
That's hopefully the first question that comes to mind when you see a yield like 11%. Normally, this would indicate that the market views this yield as unsustainable and therefore a dividend trap. But listed investment companies are often treated a little differently by the market, so let's probe a bit farther.
As at 30 April, WAM Capital's major holdings include TPG Telecom Ltd (ASX: TPM), Cleanaway Waste Management Ltd (ASX: CWY) and Aristocrat Leisure Limited (ASX: ALL). It also had a cash weighting of 24.6% – which indicates a bearish outlook for ASX 200 shares in my view.
On a per share basis, this LIC's net tangible asset's (NTA) came to $1.47 – which is a long way from the current share price of $2.01.
So in other words, this yield is now looking even more impressive considering the share is trading for a 37% premium to its underlying value. If WAM Capital shares were trading at their NTA value, the dividend yield would be 10.54% or 15.06% grossed-up.
But here's the kicker, WAM Capital's last interim dividend came in at 7.75 cents per share. As of April, the LIC only had 6.1 cents per share left in its profit reserves. This tells us that WAM Capital is running out of gas in the tank. Unless things turn around soon (and it will have to be very soon), it doesn't look like this company will be able to afford to continue paying its generous dividends at their current levels.
As such, I think there is a lot of risk in buying WAM Capital shares today for dividend income. Particularly since the share price is trading 37% above its underlying value, as this would effectively mean buying 63 cents worth of value for $1.
Thus, it's a 'no-deal' from me.
