Is WAM Capital stock a buy for its whopping 11% dividend?

Be careful what you wish for in an 11% yield…

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The first thing that might grab your eye when taking a look at the WAM Capital Ltd (ASX: WAM) stock price is its monstrous dividend yield. WAM Capital's most recent share price was $1.43. At that price, this listed investment company (LIC) seemingly offers a trailing dividend yield of 10.84%.

Right off the bat that dividend yield alone looks like it offers a superior return to that of an ASX-wide index fund. Even more so when you consider that this dividend yield came with full franking credits over the past 12 months.

So is WAM Capital stock a buy for this near-11% yield today?

Well, to answer that question, let's go over how an LIC like WAM Capital works. Instead of being a company like Coles Group Ltd (ASX: COL) or Telstra Group Ltd (ASX: TLS) that sells goods or services, WAM Capital effectively functions as a closed-ended managed fund of sorts. It owns its own portfolio of ASX shares, which it manages on behalf of its shareholders.

In WAM Capital's case, this LIC focuses on small and mid-cap shares on the ASX. As of 31 October 2023, some of its top holdings included Life360 Inc (ASX: 360), Tuas Ltd (ASX: TUA) and Collins Foods Ltd (ASX: CKF).

But let's get to that fat dividend.

Is WAM Capital's 11% dividend yield for real?

So yes, WAM Capital's dividend checks out, at least based on its past. The company has funded two dividend payments over the past 12 months. There was the May interim dividend of 7.75 cents per share. As well as October's final dividend of 7.75 cents per share. Both payments came fully franked.

At the most recent WAM Capital share price of $1.43, these payouts translate into a trailing yield of 10.84%.

But, like with any dividend yield, this reflects the past, not the future.

I don't have too much confidence that investors will continue to enjoy a yield of that magnitude.

Why? Well, WAM Capital told us in its October update that it only had 6.5 cents per share left in its profit reserve, which it uses to fund dividend payments. That tells us that the company doesn't even have enough cash in the bank for its next dividend payment, let alone the one after that.

This LIC has also paid out the same dividend since 2018, meaning that investors have gone more than five years without a pay rise. But over that period, the WAM Capital share price has lost almost 40% of its value.

In fact, you can buy WAM Captial shares today for the same price as they were going for way back in 2002.

So we have a company that has failed to deliver any capital growth for more than two decades, and that looks like it is running out of its capacity to keep paying dividends at its past capacity. This is probably the reason why WAM capital shares are trading on such a high dividend yield right now.

As such, I do not think this company is a buy, for capital growth, sustainable dividends, or any other reason, quite frankly.

Motley Fool contributor Sebastian Bowen has positions in Telstra Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Life360. The Motley Fool Australia has positions in and has recommended Coles Group and Telstra Group. The Motley Fool Australia has recommended Collins Foods. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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