When you ask an ASX investor to name an ASX dividend share, chances are you’ll hear something like Commonwealth Bank of Australia (ASX: CBA), Woolworths Group Ltd (ASX: WOW), or Telstra Corporation Ltd (ASX: TLS). And fair enough too. These blue-chip shares, along with plenty of other popular names, have been around a long time.
Over decades (in most cases), these Australian companies have built up their presence, both in our day-to-day lives, as well as in the minds of investors. We’ve seen growth and plenty of dividends and franking credits from all of them over the years.
It’s doubtful these names have the same kind of impact on any investor’s psyche as the names listed above. But perhaps for an ASX dividend investor, they should. After all, CBA, Woolworths, and Telstra currently have trailing dividend yields of 3.54%, 2.39%, and 3.00% respectively.
But WAM Capital currently has 7.31% on the table. Naos is offering up 7.43%, while Ophir High Conviction Fund currently boasts a whopping yield of 13.22%.
These ASX shares certainly aren’t household names in the same league as CBA or Woolies. But they certainly have something to say when it comes to dividends. So what’s going on here? How can these shares offer such stupendous yields?
Why do some LICs offer such big dividend yields?
Well, it comes down to their nature. See, all of those companies are listed investment companies (LICs). That means they aren’t the traditional businesses we are used to seeing on the ASX.
A LIC functions more like a managed fund than a business. It invests its capital into other investments for the benefit of its shareholders. WAM Capital, for instance, invests in a portfolio of ASX shares that WAM describes as “undervalued growth companies”.
A traditional company like Telstra funds its dividends from its pool of profits. But a LIC can fund its dividend payments from two sources. It is entitled to the dividends and franking credits of its underlying holdings for one. So if a LIC like Ophir or Naos receives a dividend from a company in its portfolio, it can pass it on to its own shareholders.
But a LIC can also bank the profits it makes from buying and selling these shares. If it does so successfully, it can also use these funds to boost its dividends to its own shareholders. That is why we often see LICs like WAM Capital and Ophir with hefty trailing yields.
Of course, this doesn’t always translate into massive profits for investors. For example, despite its 7.31% dividend yield right now, WAM Capital has only given a total return of 1.7% over the 12 months to 31 March (not including fees either). That compares poorly against its benchmark All Ordinaries Total Accumulation Index (ASX: XAOA), which returned 15.5% over the same period.
But food for thought, nonetheless.