When it comes to ASX dividend shares, usually investors are sceptical when a yield of 10% or more is on offer. These shares are often referred to as ‘dividend traps’ because the yields simply look too good to be true (and in a dividend trap’s case, they are). However, sometimes an opportunity for a 10%-plus yield is worth a good look.
So today, I’ll be looking at an ASX dividend share that indeed offers a trailing dividend yield of 6.95% on current prices, which grosses-up to 9.93% if you include the value of its full franking credits.
That share is WAM Research Limited (ASX: WAX)
What is WAM Research?
WAM Research is a listed investment company (LIC), which basically means it’s a company that buys and sells shares of other companies on behalf of its investors. It’s a similar structure to a managed fund, but is listed on the stock exchange in its own right.
WAM Research is run by the reputable Wilson Asset Management (WAM) and was founded back in 2003. Since 2010, the LIC has returned an average performance of 15% per annum (not accounting for fees and taxes). Its modus operandi is finding ‘undervalued’ industrial growth shares that the management team sees as having a ‘pricing catalyst’ ahead of it (something with the potential to result in share price appreciation). Once this catalyst is realised (if it is), the shares are often sold and the profit banked.
Some of the shares that WAM Research is currently invested in (as of 30 September) include Adairs Ltd (ASX: ADH), Elders Ltd (ASX: ELD), Breville Group Ltd (ASX: BRG), Kogan.com Ltd (ASX: KGN) and Redbubble Ltd (ASX: RBL).
Is a 10% dividend sustainable?
WAM Research banks its investing profits in what it calls a ‘profit reserve’. Dividends are then paid out of this profit reserve. So WAM Research’s last two dividends (paid in February and August 2020) came in at 4.9 cents per share each. That 9.8 cents per share in annual dividends is what gives WAM Research a trailing dividend yield of 6.95%, based on the most recent share price of $1.41 (at the time of writing).
So WAM Research’s profit reserve can give us a fairly good idea of how sustainable this massive yield is. As of 30 September, the LIC reported that its profit reserve stands at 34.9 cents per share. Using some crude mathematics, we can see that WAM Research has enough petrol in its tank to fund the current dividend for another three or so years. That looks pretty sustainable to me.
Upon examination, WAM Research’s stupendous 10% dividend yield looks to be sustainable, at the very least for a number of years. Given this LIC’s long history of impressive performance, and its income potential, I think WAM Research would look pretty appealing for those investors seeking dividend income from their ASX shares.
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Returns As of 6th October 2020
Sebastian Bowen owns shares of WAM Research Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia has recommended ADAIRS FPO, Elders Limited, and Kogan.com 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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