As the ASX’s largest Listed Investment Company (LIC), the Australian Foundation Investment Co. Ltd (ASX: AFI) share price is a popular choice for many passive investors. A LIC is a share market investment that functions more similarly to a managed fund than your traditional ASX share. It is a company. But one that invests in its own portfolio of other ASX shares for the benefit of its shareholders.
Thus, many investors hold AFIC shares seeking an easy, broad-based, diversified and dividend-paying investment. One that will hopefully deliver a sprinkle of market outperformance over a long time frame. Its current top shares mostly consist of blue-chips like Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP) and Macquarie Group Ltd (ASX: MQG).
But as we approach the halfway mark of 2022, it is inflation that is at the top of many investors’ concerns right now. Earlier this week, we got the shocking news that Australia’s annual inflation rate is now running at 5.1%, a two-decade high.
So are AFIC shares an effective inflation hedge?
Well, inflation of 5.1% means that an investment has to have grown by 5.1% just to keep an investor’s capital level in real terms.
That means that AFIC’s dividend alone doesn’t cut the mustard. The company presently offers a dividend yield of 2.9% on current pricing. This dividend, including the full franking credits, grosses up to 4.14%. AFIC hasn’t increased its dividend for a few years now. Its interim payment that investors saw in February was 10 cents a share, the same interim dividend it paid in 2016.
However, over the past year, AFIC shares have increased by 10.56% in value. Adding that to the grossed up dividend yield of 4.14% and we get a total trailing return of 14.7%. Subtracting inflation of 5.1% and we get a real return of 9.6% for the past 12 months.
So over the past year, AFIC has indeed been an inflation-busting hedge. But past performance is no guarantee of future returns, so take that with a grain of salt.