Is the WAM Capital (ASX:WAM) 10% dividend yield sustainable?

Is WAM Capital Ltd (ASX: WAM)’s 10% grossed-up, fully franked dividend yield looking sustainable today? It’s certainly an improvement…

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WAM Capital Limited (ASX: WAM) is a listed investment company (LIC) well-known for its fully-franked dividends. Since its inception in 1999, WAM Capital has returned an average of 16.1% per annum for its investors (before fees and taxes). A large part of this outperformance has come in the form of dividend payments. The company has been holding or increasing its dividend every year since 2010. Saying that, the dividend has been held steady at 15.5 cents per share for the last two years. This dividend still gives WAM Capital shares a trailing yield of 6.92% on current prices. That’s 9.89% grossed-up with WAM Capital’s full franking credits (I apologise for rounding this up to 10% in the headline).

A WAM comeback tour

In recent times, I have written about how I wouldn’t be too interested in WAM Capital for dividend income. That concern largely stemmed from WAM Capital’s dwindling profit reserve. LICs usually pay out their dividends from a profit reserve. A profit reserve stores profits from investment activities earmarked for dividend payments.

Some other LICs, like WAM Capital’s sibling, WAM Research Limited (ASX: WAX), have well-funded profit reserves. In WAM Research’s case, its two most recent dividends came in at 4.9 cents per share each. That gives WAM Research a trailing, grossed-up yield of 9.21% on current pricing. Yet this dividend looks remarkably sustainable given that WAM Research had 34.9 cents per share in its profit reserve, as of 31 August.

But as of 31 July, WAM Capital had just 8.7 cents per share left in its profit reserve. Some simple maths will tell you that this isn’t enough to sustain a 15.5 cents per share annual dividend for too long.

But WAM Capital’s August update contained a pleasant surprise. As of 31 August, WAM Capital now reports it has 17.5 cents per share in its profit reserve. How did it manage this recovery? Well, the company told investors that last month was “the best August reporting season in the company’s history”, with winners like Codan Limited (ASX: CDA) helping to boost the LIC’s profits.

Although the newly restocked profit reserve isn’t quite at the comfort level for income investors that WAM Research provides, it’s still a marked improvement and buys WAM Capital another year to expand this reserve even further.

Is WAM Capital a buy today?

WAM Capital’s dividend stockpile certainly looks a lot healthier than it did a month ago. Saying that, I’m still not convinced it remains a better option for income investors over other LICs like WAM Research. Although its August profit reserves were a fantastic development for investors, I would simply prefer the increased certainty that something like WAM Research provides today. I’ll be keeping my eye on WAM Capital though and may rethink my position if its profit reserves improve further.

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