Listed investment companies (LICs) are a great option to invest in for big dividend yields in my opinion.
What’s a LIC?
A LIC is a company just like any other. LICs provide half-year and annual reports, they have boards of directors and so on.
Normal operating companies might be a retailer, a bank, a tech company or something like that. The main difference is that LICs invest in other businesses on behalf of shareholders.
LICs make profit from investment returns. That’s a combination of capital growth and the dividends the LICs receives from its investments.
The boards of LICs can choose to pay a smoothed dividend for investors with its total returns.
Here are three ideas with big dividend yields of more than 7%:
WAM Leaders Ltd (ASX: WLE)
WAM Leaders is a LIC run by Wilson Asset Management (WAM). The LIC targets large cap ASX shares. But you shouldn’t think of it as a passive investment vehicle like an exchange-traded fund (ETF). It’s quite active, switching between positions to try to make the best profit it can.
Over the past year its portfolio returned 2.7% before fees, expenses and taxes, outperforming the S&P/ASX 200 Accumulation Index by 10.4%. That’s impressive in my opinion.
In FY20 the LIC increased its dividend by 15% to 6.5 cents per share. That equates to a grossed-up dividend yield of 8.1% at the current WAM Leaders share price. It has increased its dividend each year since FY17 when it started paying one – it was only formed in 2016.
At the end of June 2020 it had a portfolio well suited to ride through any COVID-19 problems. Some of its biggest holdings were: BHP Group Ltd (ASX: BHP), CSL Limited (ASX: CSL), Goodman Group (ASX: GMG), Newcrest Mining Limited (ASX: NCM), OZ Minerals Limited (ASX: OZL), Rio Tinto Limited (ASX: RIO), Telstra Corporation Ltd (ASX: TLS) and Woolworths Group Ltd (ASX: WOW).
NAOS Small Cap Opportunities Company Ltd (ASX: NSC)
This LIC is run by Naos Asset Management, a manager which focuses on smaller ASX shares.
Naos generally has a portfolio around 10 names which it aims to be invested in for at least five years. That’s a high-conviction portfolio.
Over FY20 NAOS Small Cap Opportunities Company outperformed the S&P/ASX Small Ordinaries Accumulation Index by 8.26% before fees, taxes and interest.
The LIC seems committed to paying a quarterly dividend of 1 cent per share. That equates to an annual grossed-up dividend yield of 11.3% at the current NAOS Small Cap Opportunities Company share price.
Using the pre-tax net tangible assets (NTA) per share of $0.68 at 30 June 2020, it’s trading at 26% discount to last month’s NTA. We’ll have to wait a week or two to see July’s NTA.
Future Generation Investment Company Ltd (ASX: FGX)
Future Generation is a LIC with a twist. It doesn’t invest in individual ASX shares. It invests in funds of fund managers that invest in ASX shares. But neither Future Generation or the fund managers charge any management fees. That enables Future Generation to donate 1% of its net assets per year to youth charities.
At the current Future Generation share price it offers a grossed-up dividend yield of 7.1%. It has increased its dividend each year since 2015.
It’s invested in around 20 fund managers at the moment. I think that provides a lot of attractive diversification. Bennelong is the fund manager with the biggest allocation right now.
Future Generation is trading at a 13% discount to the NTA at the end of June 2020.
I like all three of these LICs for dividend income potential. The Naos LIC clearly has the biggest yield and it’s trading at a big discount to its NTA. But Future Generation offers very attractive diversification, a good discount and a good yield too. It’s hard to pick between these two.
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Tristan Harrison owns shares of FUTURE GEN FPO and NAO SMLCAP FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. and Over The Wire Holdings Ltd. The Motley Fool Australia owns shares of and has recommended MNF Group Limited and Telstra Limited. The Motley Fool Australia has recommended Over The Wire Holdings Ltd. 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.
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