Is Naos Emerging Opportunities Company Ltd (ASX:NCC) a buy for its 8.6% yield?

Naos Emerging Opportunities Company Ltd (ASX:NCC) has a large yield 8.6% yield.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There are few shares on the ASX that have both a higher yield and a longer dividend growth streak than Naos Emerging Opportunities Company Ltd (ASX: NCC).

If we assume another 3.75 cents per share dividend for the full-year result then Naos Emerging Opportunities Company currently has a grossed-up dividend yield of 8.6%. It has increased is dividend every year since it started paying one in the second half of FY13.

However, investors shouldn't buy just for the yield. Some shares can be yield traps like Telstra Corporation Ltd (ASX: TLS) has been.

What it is

Naos Emerging Opportunities Company is a listed investment company (LIC) run by Naos Asset Management. Over the past five years its portfolio has returned an average of nearly 15% per annum before fees but after operating expenses. Some managers only show their performance before operating expenses.

How it generates strong performance

This LIC looks to create outperformance by creating a concentrated portfolio of high-conviction ideas that it invests in for the long-term. At the end of FY18 it had nine positions. This is a small amount compared to some other managers, but it's still better diversification for your portfolio than simply holding a single business.

The key part of this LIC's strategy is to invest in undervalued emerging companies. This generally means businesses with market capitalisations under $250 million. It has an internal hurdle rate of 20% per annum over a rolling three-year period for its investment holdings. Obviously the returns don't always match 20% per annum, but that's the target.

How aligned the management are

Naos directors and employees (and related parties) own over 10 million shares of Naos Emerging Opportunities Company, which means combined they own more than 16% of the business.

Having aligned management doesn't automatically mean returns will be better, but it does mean they want the same results as shareholders and they aren't likely to take unnecessary risks.

Is it a buy?

Over the past year the LIC's portfolio returned 7.13% compared to the S&P/ASX Small Ordinaries Accumulation Index which returned 24.25%. It was a huge year for the index and I wouldn't expect the same to happen again any time soon.

I believe that the small cap space is the best place to find outperformance, so I think this Naos LIC is well worth a place in your portfolio if you want more small cap exposure. It's trading at around its post-tax NTA, so I think it's a good buy today. Just be aware that in some years small caps can be particularly volatile.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Growth Shares

A bland looking man in a brown suit opens his jacket to reveal a red and gold superhero dollar symbol on his chest.
Growth Shares

3 exciting Australian growth shares to buy with $3,000 in August

Analysts think these shares could be top buys for Aussie growth investors.

Read more »

Young woman waiting for job interview.
Growth Shares

Australian job ad volumes declined last month. Are Seek shares a sell?

Should investors seek returns elsewhere?

Read more »

happy investor, share price rise, increase, up
Growth Shares

The best ASX growth shares to buy now

These growth shares have been recommended as buys.

Read more »

A young well-dressed couple at a luxury resort celebrate successful life choices.
Growth Shares

Where to invest $2,500 in ASX shares in August

Let's see which shares are being tipped as buys for next month.

Read more »

Person pointing at an increasing blue graph which represents a rising share price.
Growth Shares

What to buy now with the ASX at a record high

Analysts think these shares could still rise strongly from current levels.

Read more »

A young man looks at a stylised investment graph superimposed on an exterior office building backdrop.
Growth Shares

Where to invest $10,000 in ASX 200 stocks today

Analysts think these high-quality shares are in the buy zone for investors right now.

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Growth Shares

Two ASX industrials shares with buy recommendations

One broker believes these growth shares are set to rise.

Read more »

Man smiling at a laptop because of a rising share price.
Growth Shares

I think these 2 exciting ASX growth shares are buys today

These stocks could deliver big returns.

Read more »