Over the past year, the rise of the ASX share market has pushed the dividend yields on many popular income stocks to rarely-seen lows.
There are countless examples of this. It might be Coles Group Ltd (ASX: COL)'s 3.34% yield, Wesfarmers Ltd (ASX: WES)'s 2.43%, Telstra Group Ltd (ASX: TLS)'s 3.83%, or, most infamously, Commonwealth Bank of Australia (ASX: CBA)'s 2.66%.
All of those yields we just listed would have been unthinkable a few years ago. And yet, here we are.
This situation has made hunting for yield far harder than it used to be for income investors.
And yet, there's one popular ASX dividend that hasn't joined the train. That would be listed investment company (LIC) WAM Capital Ltd (ASX: WAM).
WAM Capital has been on the ASX for over 25 years now. Over this period, it has become a top pick for retirees and other income investors thanks to the large dividend yields it routinely sports.
Over the past 12 months, WAM Capital has paid out two dividends, each worth 7.75 cents per share.
At today's price of $1.62, those dividends give the company a trailing yield of 9.51%.
However, in my view, there are a number of red flags that investors should keep in mind before rushing out to secure this dividend yield.
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What's wrong with this ASX dividend share's 9.5% yield?
Firstly, WAM Capital is not a good performer. Its shares have lost almost 15% of their value since this time in 2020, and more than 32% since October of 2021.
Secondly, the company charges a not-insubstantial management fee of 1% per annum for its services, as well as a performance fee if it outperforms its ASX benchmark. The company's performance figures don't include this fee, but it is hefty and will detract significantly from returns going forward. In recent years, shareholders have, in effect, been paying for their dividends with their own capital.
Thirdly, WAM Capital currently only has 17.6 cents per share in its profit reserve from which it funds its dividends. That's only enough to keep it current dividend going for one more year. If the company has a bad year, it won't take long for that reserve to be exhausted, which would immediately threaten its 9.5% yield.
Foolish takeaway
When an ASX dividend share trades at such a high yield, it is usually a warning sign that the market is pricing in the risk of a dividend cut. That is likely to be the case for WAM Capital shares today.
As such, I think investors who value receiving dividend income are better off looking elsewhere for their returns right now.
