Australian Foundation Investment Co Ltd (ASX: AFI) (AFIC) shares could be an easy first choice for beginner investors looking for a simple starting investment.
It's not a business you'd find in the S&P/ASX 200 Index (ASX: XJO). That's because it's a listed investment company (LIC), one of the oldest on the ASX.
The job of an LIC is to invest in other shares and assets on behalf of shareholders who perhaps don't want to do any investing themselves. For beginners, it could be a good introduction to the ASX share market.
What does it try to do with its investments?
AFIC says that it wants to provide shareholders with "attractive investment returns through access to a growing stream of fully franked dividends and enhancement of capital invested over the medium to long term".
It measures itself against the S&P/ASX 200 Accumulation Index (ASX: XJOA), which is a group of 200 of the ASX's blue chips.
AFIC's holdings are somewhat similar to the ASX 200, but it has made a number of tactical changes.
Let's have a look at the top ten positions in the portfolio as at 28 February 2023:
Commonwealth Bank of Australia (ASX: CBA) – 9% of the portfolio
BHP Group Ltd (ASX: BHP) – 8.5% of the portfolio
CSL Limited (ASX: CSL) – 8.1% of the portfolio
Macquarie Group Ltd (ASX: MQG) – 4.9% of the portfolio
Transurban Group (ASX: TCL) – 4.7% of the portfolio
Wesfarmers Ltd (ASX: WES) – 4.1% of the portfolio
Westpac Banking Corp (ASX: WBC) – 3.9% of the portfolio
National Australia Bank Ltd (ASX: NAB) – 3.8% of the portfolio
Woolworths Group Ltd (ASX: WOW) – 3.1% of the portfolio
Rio Tinto Limited (ASX: RIO) – 2.5% of the portfolio
Its portfolio is nicely diversified across sectors, though it does have the largest weightings to ASX bank shares and ASX mining shares, just like the ASX 200.
Can AFIC shares work for beginners?
AFIC can be a very simple, passive way for investors to get exposure to the ASX share market.
I think two of the best reasons to consider this LIC for a beginning investment, or an investment for any time, are its low annual management fee of just 0.16% and its consistent dividend.
Low costs mean that almost all of the returns generated stay in the hands of investors, rather than a relatively large portion going to the fund manager. In turn, this means that compounding is stronger than it otherwise may have been.
AFIC also seems committed to paying a consistent dividend to investors. While there hasn't been a lot of growth, it can give people stability and confidence — although dividends aren't guaranteed payments.
The last two declared dividends from AFIC shares amount to 25 cents per share, which is a grossed-up dividend yield of 4.9%. This dividend can be re-invested using the dividend reinvestment plan (DRP), allowing investors to build up their AFIC position brokerage-free.
Ultimately, I think AFIC can work well as a beginner investment. However, there are a few reasons why I don't think it might be one of the best choices out there for beginners.
For starters, the AFIC share price is trading at a higher price than the underlying value of the portfolio of shares – the $1 basket of shares is priced at more than $1.
Its investments are focused on huge ASX shares that may not have a lot of growth ahead of them, and it largely misses out on the global share market, which may have more growth potential over time.
With that in mind, an exchange-traded fund (ETF) like Vanguard MSCI Index International Shares ETF (ASX: VGS) could provide more of what beginner investors are hoping for with decades of investing ahead of them.
