At first glance, the dividend yield on WAM Capital Ltd (ASX: WAM) shares might look too good to pass up. At it stands today, shares of this listed investment company (LIC) are trading on a trailing yield of 8.68%. That comes with full franking credits attached, too.
Most investors would be delighted to receive this kind of return from dividends alone. However, I think this dividend yield is something of a wolf in sheep's clothing.
For one, this LIC charges a hefty management fee of 1% per annum. On top of that, investors are also subject to an additional 20% performance fee.
For another, what WAM Capital shareholders get in dividends, they seem to pay for with their capital. The WAM share price itself has been a dastardly performer in recent years. The company last peaked at over $2.50 a share way back in early 2017. Since then, investors have watched as the WAM Capital share price has lost almost a third of its value.
So rather than opting for the siren song of WAM Capital's high dividend yield, I think ASX income investors would be far better off choosing the BetaShares S&P Australian Shares High Yield ETF (ASX: HYLD).
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Why this ASX ETF over WAM Capital's 8% dividend yield?
This exchange-traded fund (ETF) holds an underlying portfolio of ASX dividend shares. These are selected both on their history of paying out hefty income, as well as their likelihood to continue said payments into the future.
Some of HYLD's current holdings include Westpac Banking Corp (ASX: WBC), BHP Group Ltd (ASX: BHP), Wesfarmers Ltd (ASX: WES) and Macquarie Group Ltd (ASX: MQG).
Instead of charging a fee north of 1%, this ETF will only set investors back 0.25% per annum. That fee, which is four times cheaper than WAM Capital's, can make a huge difference over a long period of time.
Additionally, the BetaShares Australian Shares High Yield ETF pays out a dividend every single month. This is a relatively new ETF, with the inaugural dividend due later this month on 16 September.
This inaugural dividend will be worth 11.92 cents per share, which, if annualised, would give the Betashares Australian Shares High Yield ETF a dividend yield of 4.57% at current pricing. No doubt many income investors will appreciate that cash flow regularity.
Sure, this ETF's starting yield is not as chunky as WAM Capital's 8.68%. But I expect HYLD to deliver far higher overall returns than WAM Capital in the future.
