There are some ASX dividend shares out there paying out huge amounts of cash.
You need to be careful with high dividend yields. Sometimes those shares can actually be yield traps. The dividend may be unsustainably high. It could include a one-off special dividend. The market may actually be expecting an earnings fall and therefore a dividend cut.
But if you can find great high yield ASX dividend shares, you can receive large amounts of cash dividends (and franking credits) every year for a bit less risk. Just don't expect a lot of capital growth.
Here are some ideas to think about:
Share 1: Challenger Ltd (ASX: CGF)
Challenger is the annuity king of Australia with a dominant market share. The Challenger share price has dropped almost 50% from the share price at 21 February 2020. This has pushed the trailing dividend yield to a very high level. It currently has a grossed-up dividend yield of 9.25%. That's a great yield for an ASX dividend share.
The company has reaffirmed its profit guidance for FY20, which leads me to believe the dividend can be maintained. Challenger didn't cut its dividend during the GFC. I don't think it will cut during this period either.
Over the longer-term Challenger can benefit from the ageing demographics in Australia. However, the ultra-low interest rates won't help Challenger fund the annuities if the rate stays lower for longer than expected.
Share 2: WAM Research Limited (ASX: WAX)
WAM Research is a listed investment company (LIC). The job of a LIC is to invest in shares on your behalf. One of the main benefits is that it generates profit from capital gains and investment income received. It can then pay out a smoothed dividend to shareholders.
The ASX dividend share has an annualised grossed-up dividend yield of 9.6%. That seems really good in today's low interest world.
It's invested in shares like Infomedia Limited (ASX: IFM) and Citadel Group Ltd (ASX: CGL) which look compelling at the current prices. WAM Research is trying to find these undervalued smaller growth shares.
WAM Research has grown its dividend every year since the GFC. It likes to keep a solid amount of cash on hand for protection and opportunities. However, it's likely trading at an expensive premium to the underlying net asset value.
Share 3: Naos Emerging Opportunities Company Ltd (ASX: NCC)
This is another LIC. It counts as an ASX dividend share because it has a grossed-up dividend yield of 11.8%.
Naos does things differently to most other LICs. It only looks at shares with market capitalisations under $250 million. That certainly classifies as the small cap end of the ASX.
I admire the fact that Naos only has around 10 names in the portfolio. That means it has a high conviction in what it invests in.
Small caps are much more volatile than larger shares. I believe that means we have the infrequent opportunity to buy the ASX dividend share when it's beaten up. The coronavirus has caused the share price to drop heavily, pushing the yield higher. I think the Naos LIC is a good dividend opportunity, particularly because it hasn't cut its dividend in its relatively young history.
Foolish takeaway
Each of these ASX dividend shares have great yields. At the current prices I think Challenger could produce the biggest total returns over the next few years. However, for pure income I'd go for the Naos LIC because it's not trading at an expensive premium to its net assets like WAM Research is.
