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3 LICs with high dividend yields of over 6.5%

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I think that there are some good listed investment companies (LICs) out there that are worth investing in for high dividend yields of over 6.5%.

That sounds more attractive to me than not earning anything in the bank because of low interest rates

What is a LIC?

A LIC is a company which invests in other assets or shares on behalf of shareholders. There are plenty of LICs on the ASX which are managing money for shareholders.

Some of them are very large and have been around for decades like Australian Foundation Investment Co.Ltd. (ASX: AFI) and Argo Investments Limited (ASX: ARG) which invest in ASX blue chips.

There are other LICs that focus on small caps and can be quite volatile like WAM Microcap Limited (ASX: WMI).

Plenty of LICs offer pretty good dividend yields, but some offer even bigger yields than most:

WAM Leaders Ltd (ASX: WLE)

WAM Leaders is a LIC operated by Wilson Asset Management (WAM). The lead portfolio manager of WAM Leaders is Matthew Haupt who has managed the portfolio of large caps over the past few years.

On the dividend side of things it has a high dividend yield of 8.1%, grossed-up, at the current WAM Leaders share price. That yield includes the forward dividend guidance of a 3.5 cents per share payment.

At 31 August 2020 the LIC’s had delivered a gross return (before fees, expenses and taxes) of 10.6% per annum since May 2016, outperforming the S&P/ASX 200 Accumulation Index by 3.5% per annum. That’s solid outperformance. Over the prior 12 months its gross outperformance had been 10.7%.

It’s this strong level of performance (and outperformance) that allows the LIC to pay a solid dividend.

Large caps are generally seen as safer and more stable, which allows WAM Leaders to invest confidently. While many large cap ASX shares cut their dividends because of the pandemic, WAM Leaders has been able to still grow its dividend.

Naos Emerging Opportunities Company Ltd (ASX: NCC)

This LIC has a very high dividend yield. When grossed-up, it offers a yield of 10.5% at the current Naos Emerging Opportunities share price.

It aims to invest in small cap ASX shares with market capitalisations under $250 million. Many investors don’t venture into that area of the market, so there can be some exciting opportunities to be found at good prices.

Some of its current investments include Experience Co Ltd (ASX: EXP), Saunders International Ltd (ASX: SND) and Contango Asset Management Ltd (ASX: CGA).

Industrial small cap shares have found things tough in 2020 with the impacts of COVID-19. However, despite that, Naos Emerging Opportunities can still point to an average return per annum of 10.1% (after expenses but before fees) since inception in February 2013.

The high dividend yield seems fairly safe for the next few years as the LIC has maintained of grown its dividend very year since FY13. It has a profit reserve of 32.7 cents per share, which amounts to about four years at the current dividend level.

Future Generation Investment Company Ltd (ASX: FGX)

Future Generation is the final LIC in this article. It has increased its dividend each year over the past five years, including through this difficult COVID-19 pandemic period.

There are two main things to know about Future Generation. It donates 1% of its net assets to youth charities, which is particularly useful in this COVID-19 era.

Future Generation offers excellent diversification because it’s invested in around 20 funds of different Australian fund managers who work for free. Each of those portfolios probably represents at least 10 holdings. So there are lots of underlying shares for good diversification. 

Future Generation has a fairly high dividend yield, it has a grossed-up yield of 6.6%.

The LIC has delivered outperformance compared to the S&P/ASX All Ordinaries Accumulation Index. Over the past three years Future Generation’s gross portfolio return has beaten the index by an average of 2.1% per annum.

Foolish takeaway

All three of these LICs offer high dividend yields, which is nice for income investors. I’d be happy to buy all three at the current prices, though I think I’d prefer Future Generation because of the attractive net tangible asset (NTA) discount of around 11%.

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Motley Fool contributor Tristan Harrison owns shares of FUTURE GEN FPO and WAM MICRO FPO. The Motley Fool Australia owns shares of EXPERNCECO FPO. 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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