The ASX share WAM Microcap Ltd (ASX: WMI) is one of the few stocks with a dividend yield of more than 10% that I'd be willing to own for the long-term.
I love passive income, but the higher the yield the less likely it is to be sustainable because the business is paying out such a large part of its profit each year.
However, WAM Microcap is a bit different to a regular business that sells products or services because it's a listed investment company (LIC). In other words, it buys and sells shares to make money for shareholders.
It's not looking within the S&P/ASX 200 Index (ASX: XJO) for opportunities though. It's searching for the most exciting undervalued growth opportunities in the Australian microcap market.
Let's explore why it's such a compelling choice for dividends.
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LICs need to produce returns
For a LIC to pay sustainable, large dividends, they need to generate good investment returns.
If a LIC's portfolio generates a double-digit net return over a financial year, then it has essentially done enough to pay a 10% grossed-up dividend yield (including the franking credits).
LICs are not just passive index funds. They can invest very differently to an index, both in terms of the shares they buy and the prices they buy and sell at.
WAM Microcap's hunting ground represents an area of the market that few fund managers look. There can be some excellent opportunities at the small end of the market because they can be mispriced for their potential and the business can deliver a lot of profit growth from a small base.
The ASX share's portfolio has delivered an average return per year of 14.4% since inception in June 2017, before fees, expenses and taxes. That's despite this decade being a tricky period for small-cap shares.
I believe WAM Microcap's investment team have the ability to continue making good returns to fund future dividends.
Large dividend yield
WAM Microcap's board of directors has provided guidance that the business plans to pay an annual dividend per share of 10.7 cents for FY26. That translates into a grossed-up[ dividend yield of around 10.5%, including franking credits.
It has increased its annual dividend per share each year since FY18 (when it started paying dividends), aside from FY24 when it maintained the payout. That's a strong record of consistency for investors.
The business has a profit reserve of 49.8 cents per share of profit which it built in previous years. That means it could pay the same dividend level for four and a half years without needing to earn any investment returns.
I think Aussies are missing out if they don't have exposure to small-cap shares for both the diversification and potential returns. WAM Microcap can provide that exposure, along with a great dividend yield level.
There are also other ASX shares that could make great investments today to own for the long-term.
