The ASX stock L1 Long Short Fund Ltd (ASX: LSF) is one of my favourite ideas for passive income due to its rapid growth in quarterly payouts for shareholders amid impressive investment performance.
The listed investment company (LIC) is already one of the larger players in the LIC sector, with a market capitalisation of around $3 billion, according to the ASX. I wouldn't be surprised if it became the largest in Australia one day, given its growth trajectory.
The investment team from L1 Group Ltd (ASX: L1G) have delivered great portfolio returns which has unlocked share price growth and dividends.
Let me explain why the LIC is such an attractive pick to unlock $500 per week of passive income.
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Compelling investment process
Before I talk about the returns, it's important to keep in mind that past performance is not a guarantee of future performance. Plus, we should judge fund managers based on long-term returns, not just an excellent single year.
The LIC's portfolio has delivered an average net return per year of 17.9% over the last three years, 16.1% per year in the past five years and 20% per year in the prior seven years. Since the start of the L1 long-short strategy in September 2014, it has returned an average of 19.9% per year.
It invests in both ASX shares and international shares, using both long-term investing and short selling (betting that a share price could go down) strategies. By investing in different markets and stocks for both gains and declines, it has been able to match the ASX in positive months and significantly outperform during market downturns.
The LIC's latest commentary on its portfolio highlights its process for picks, which are sometimes contrarian:
We continue to focus on company-specific opportunities where valuation and earnings delivery can drive returns across a range of market environments. We believe the portfolio looks well placed at present, with the median long position trading on 10x P/E, supported by double-digit EPS growth and modest debt levels.
Great dividend payouts
Given those investment returns, the business has been steadily increasing its passive dividend income to shareholders.
The business has increased its annual payout each year since it started paying its dividend in 2021. It changed to a quarterly payment frequency last year rather than half-yearly payouts. The ASX stock's quarterly payout has been hiked each quarter since the shift last year.
Over the next four quarters, I expect the dividend will be at least 15.8 cents per share, which currently translates into a dividend yield of 3.3% excluding franking credits and 4.75% including franking credits.
I think that's a great starting point for the yield considering the dividend could significantly increase in the coming years.
$500 of passive income per week
The LIC doesn't pay every single week, but we can think of the weekly goal as an annual, or annualised, goal. With $500 per week, we're talking about an annual goal of $26,000.
With a potential 15.8 cents per share in the year ahead, it would take 164,557 L1 Long Short Fund shares to unlock the desired income goal.
The LIC does have a diversified portfolio itself, so I wouldn't mind investing significantly into the LIC. However, I do think it would be a good idea to own a diversified portfolio rather than put all of that money into one name, so I'd want to buy additional stocks to generate returns.
