13%? Why some ASX LICs have such high dividend yields

ASX LICs like WAM Capital have massive dividend yields. Are they worth a closer look?

| More on:
Smiling man holding Australian dollar notes, symbolising dividends.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • When it comes to ASX dividend shares, companies like CBA and Telstra dominate investors' horizons
  • But many LICs out there offer yields far higher than most ASX blue chips
  • These include WAM Capital, Ophir High Conviction Fund, and Naos Emerging Opportunities Company

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.

But what about names such as WAM Capital Limited (ASX: WAM)Ophir High Conviction Fund (ASX: OPH), or Naos Emerging Opportunities Company Ltd (ASX: NCC)?

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.

Motley Fool contributor Sebastian Bowen owns Telstra Corporation Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns and has recommended Telstra Corporation Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Dividend Investing

Close-up photo of a back jean pocket with Australian dollar bills in it and a hand reaching in to collect the notes
Dividend Investing

Experts name 2 ASX dividend shares with big yields to buy

These dividend shares with big yields have been named as buys...

Read more »

A woman looks quizzical while looking at a dollar sign in the air.
Dividend Investing

How much have CSL shares paid in dividends over the last 5 years?

We take a look at the biotech giant's dividend history.

Read more »

An executive in a suit smooths his hair and laughs as he looks at his laptop feeling surprised and delighted by the gains of ASX mining shares
Dividend Investing

Brokers name 2 ASX dividend shares to buy next week

Brokers are positive on these dividend shares...

Read more »

A woman ponders a question as she puts money into a piggy bank with a model plane and suitcase nearby.
Travel Shares

When might Corporate Travel shares start paying dividends again?

It;s been two years since investors saw a dividend from this ASX travel share...

Read more »

Australian dollar notes rolled into bundles.
Dividend Investing

2 ASX 200 dividend shares analysts rate highly

Here are two ASX 200 dividend shares rated as buys....

Read more »

Young boy wearing suit and glasses adds up on calculator with coins on table
Dividend Investing

What is the current dividend yield on Nickel Industries shares?

We look at what kind of income investors can expect from Nickel Industries shares.

Read more »

Woman looking at her smartphone and analysing share price.
Dividend Investing

Here’s 3 popular ASX shares that are trading ex-dividend next week

Seeking a dividend income? Here are three ASX shares about to trade ex-dividend.

Read more »

Woman holding $50 notes and smiling.
Dividend Investing

Is the Woodside share price a buy for its 13% dividend yield?

Is Woodside actually one of the best ASX 200 picks for income?

Read more »