Despite a 34% share price reduction since 2021, ASX dividend share WAM Capital Ltd (ASX: WAM) remains popular with some ASX investors, particularly those who prioritise receiving dividend income.
Looking at WAM Capital shares today, it's not hard to see why. At the present time, shares of this listed investment company (LIC) are trading on a trailing dividend yield of 9.81%.
That comes from the 15.5 cents per share in dividends that WAM Capital has paid out over the past 12 months, coupled with the LIC's share price of $1.58 (at the time of writing).
So that near-10% yield is legitimate, as much as a trailing yield can be, at least. But let's discuss whether buying WAM Capital shares today will result in an investor enjoying a yield of that magnitude going forward.
As a LIC, WAM can only fund dividends for its shareholders in two ways.
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Is WAM Capital's 10% dividend yield too good to be true?
The first involves passing on the dividend income that WAM itself receives from its underlying portfolio of ASX dividend shares. WAM Capital invests in a portfolio of small and mid-cap stocks that are selected for their potential as "undervalued growth opportunities" or to realise an upcoming share price 'catalyst'.
Some of WAM's current holdings (as of 30 April) include Megaport Ltd (ASX: MP1), A2 Milk Company Ltd (ASX: A2M), and Life360 Inc (ASX: 360).
The second way WAM can add cash to its profit reserve to fund its dividend payments is by selling a holding that has risen in value, thus cementing a profit on its investment.
The data suggests that this ASX dividend share is struggling to do this at a sustainable level. To illustrate, the company reports that it currently (again, as of 30 April) has 17.1 cents per share in its profit reserve. That's enough for just over one year's dividend payments. If WAM has a bad year, it seems likely that investors might have to brace for a dividend cut.
ASX dividend share loses its franking
Another thing to note is that this ASX dividend share hasn't increased its annual dividend since 2018. Seven years of stagnant income might be one of the reasons why WAM Capital shares have lost more than a quarter of their value since 2021. That means that, while investors have continued to receive a steady dividend since then, their capital base has been eroding from under them. WAM Capital's rather steep management fee of 1% per annum (plus a 20% performance fee) wouldn't be helping that either.
It's also worth pointing out that WAM's ability to dole out franking credits alongside its dividends is diminishing. This could possibly be a result of a lack of sellable portfolio winners. To see this in action, we only need to look at the company's most recent payouts. Until 2024, WAM Capital's payouts had almost always come with full franking credits attached. But since last year, the payments have only come partially franked at 60%.
Foolish Takeaway
It's always difficult to predict what an ASX dividend share might pay going forward. However, when it comes to WAM Capital, there are a few signs that investors could be facing a dividend cut in the future.
As such, investors should keep in mind that buying this LIC at the current pricing does not guarantee that they will receive that near-10% yield. Tread carefully; this could well be a classic case of the dreaded 'dividend trap'.
