When it comes to ASX dividend shares, income investors are spoilt for choice. The ASX has dozens and dozens of dividend payers that call it home.
When choosing an ASX dividend share, many investors use a company's raw dividend yield as their most important criterion. But this could be a mistake. There is always the possibility that a company with a high trailing yield turns out to be a dividend trap.
But there are other pitfalls of a high yield. Let's talk about one popular ASX dividend share that seemingly offers a massive yield today, but which I think could result in sub-par returns for investors regardless. It's the WAM Capital Limited (ASX: WAM) share price.
WAM Capital is a listed investment company (LIC) that has been around since 1999.
Right now, WAM Capital shares have a fully franked trailing dividend yield of 9.69%. That comes from the 15.5 cents per share the company has paid out over the last 12 months. WAM Capital has paid this same fully franked dividend out every year since 2018.
So that all looks pretty good, right?
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This ASX dividend share offers income, but poor returns
Well, consider this. Since January 2018, the WAM Capital share price has gone from $2.48 to $1.60. That means that investors have lost, on average, 8.4% of their capital in share price returns alone. Even including the company's dividends, investors have barely broken even.
LICs' share prices can perform independently of their underlying investment portfolio, however. And over the five years to 31 December, WAM Capital's investment portfolio has increased by an average of 4.5% per annum.
However, even though that includes dividend returns, it doesn't come close to matching the 7.2% per annum return of the S&P/ASX All Ordinaries Accumulation Index that WAM Captial uses as a benchmark.
It doesn't include WAM Capital's hard-to-find 1% per annum management fee either, which further shaves down the returns investors have enjoyed.
Put simply, investors are being asked to pay a rather steep 1% management fee every year for chronic market underperformance. Investors would have been far better off sticking with an ASX 200 index fund like the iShares Core S&P/ASX 200 ETF (ASX: IOZ).
This exchange-traded fund (ETF) returned an average of 7.1% per annum over the five years to 31 December. That includes the fund's far more reasonable 0.09% per annum management fee.
So considering all of this, WAM Capital is an ASX dividend share that I wouldn't touch with a 10-foot pole today. Nor would I touch most of the other LICs that Wilson Asset Management has on offer, for similar reasons.
Sometimes, a 9.69% dividend yield isn't worth all it might be cracked up to be.
