I think that WAM Microcap Limited (ASX: WMI) is a retiree's dream dividend share.
Plenty of retirees just have a portfolio stuffed full of ASX blue chips that (normally) provide a high level of dividend income.
Popular names include Westpac Banking Corp (ASX: WBC), BHP Group Ltd (ASX: BHP), Telstra Corporation Ltd (ASX: TLS), National Australia Bank Ltd (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ), Wesfarmers Ltd (ASX: WES) and Woodside Petroleum Limited (ASX: WPL).
If someone is just going to go for high yield blue chip ASX dividend shares then they may as well just pick Vanguard Australian Shares High Yield ETF (ASX: VHY) and save on a lot of paperwork.
But I think WAM Microcap could be one of the best picks for dividend income for retirees.
About WAM Microcap
It's a listed investment company (LIC) which is operated by the high-performing team at Wilson Asset Management (WAM).
WAM operate plenty of LICs like WAM Capital Limited (ASX: WAM), WAM Research Limited (ASX: WAX) and WAM Leaders Ltd (ASX: WLE).
All of the WAM LICs have a reputation for being good dividend shares. As a retiree, it's attractive to receive a high level of franked dividend income. Obviously you're getting more income from your capital, but it's also useful because retirees are usually in a low income tax bracket – so they get the best benefit from franking credits.
WAM Microcap targets small caps on the ASX, typically ones with market capitalisations under $300 million at the time of purchase.
Why I think it makes sense for retirees to own this LIC
Every LIC works the same way. They generate investment returns, which enables them to pay out a smoothed dividend over time.
LICs are very useful because it means we don't have to make the investment decisions ourselves. There are high quality investment managers working for us.
The most important thing that matters with LICs is how strong the total (net) returns are and how good the dividend is. You can't pay a good dividend if the investment returns are rubbish.
WAM Microcap has already been a strong performing ASX dividend share. I think it can continue to generate very good returns. The small cap hunting ground can be very prosperous because there aren't many investors looking at those small shares. It also helps that many small businesses have a long growth runway ahead of them. Every large business was a small business at some point.
Returns
Despite the COVID-19 market selloff, at 31 May 2020 WAM Microcap's portfolio had generated a gross return of 14.3% per annum since inception. That meant, before fees, expenses and taxes, WAM Microcap had outperformed the S&P/ASX Small Ordinaries Accumulation by 7.5% per annum since June 2017.
WAM Microcap is active with its investment picks. The investment team is always looking for the next best performer. They also have regular meetings with the management of lots of different businesses.
The strong investment returns have powered the dividend in the first few years of its existence.
Dividend
In FY18 it paid an ordinary annual dividend of 4 cents per share, plus a 2 cents per share special dividend. In FY19 it paid an ordinary annual dividend of 4.5 cents per share, plus a 2.25 cents per share special dividend.
The ASX dividend share is on track to pay an ordinary annual dividend of 6 cents per share in FY20.
That means at the current share price of $1.23, it offers a grossed-up dividend yield of 7% for FY20.
Current share portfolio
You may be interested to know some of the shares that WAM Microcap owned at 31 May 2020.
Some of the biggest positions at the end of last month were: AMA Group Ltd (ASX: AMA), Baby Bunting Group Ltd (ASX: BBN), City Chic Collective Ltd (ASX: CCX), Objective Corporation Limited (ASX: OCL), Superloop Ltd (ASX: SLC) and Temple & Webster Group Ltd (ASX: TPW). I like this group. It's diversified with very good growth potential.
Foolish takeaway
WAM Microcap could be one of the best ASX dividend shares for income over the next decade. I believe that good dividends will only be paid by those businesses generating strong profit in the coming years. I think WAM Microcap is one of those good dividend opportunities.
