One of the main dangers of investing in individual shares for income is that most companies with a large yield have some potential issues, such as:
- Low valuation, suggesting it's a risky business
- A dividend cut is on the cards, so the trailing 12 months of dividends is not the same as the upcoming year
- High payout ratio, meaning management think there is little growth available to the business to re-invest the profits
Listed investment companies (LIC) might be able to solve the income conundrum because they purely invest in other shares and can use the company structure to turn capital gains on shares into dividends.
Here are three LICs paying out large dividends:
Clime Capital Limited (ASX: CAM)
This is a fairly small LIC that invests across the spectrum of shares. It invests in large caps, medium caps, small caps and international shares.
During FY18 the Clime portfolio returned 12.9% net of fees, which is a decent result. The share price may not have grown that much over the last year, the but the actual NTA per share is increasing.
With a decent amount of cash on hand, a steadily rising dividend and a grossed-up dividend yield of 7.9% I think this LIC well worth being on an income investor's watchlist.
WAM Research Limited (ASX: WAX)
WAM Research is one of my favourite options on the ASX for income. Over the past five years its portfolio has returned an average of 18.8% per annum before fees and expenses whilst keeping a large amount of cash on hand.
It turns most of this performance into a growing fully franked dividend, which is great for people who rely on dividends to fund their life.
It has increased its dividend each year since the GFC and currently has a grossed-up dividend yield of 8.6%.
Naos Emerging Opportunities Company Ltd (ASX: NCC)
One of the best methods of outperforming the market is by focusing on small caps. Fewer investors look in the small cap area for opportunities and the smaller size means there's more room for growth.
This LIC looks at businesses with market capitalisations under $250 million that the investment team believe may be able to generate returns of 20% per annum (or more). I also like that Naos run a high-conviction portfolio, at the end of FY18 it had only nine positions.
Over the past five years its portfolio has returned an average of 14.92% per annum before fees but after expenses.
It has increased its dividend each year since the second half of FY13 and currently has a grossed-up dividend yield of 8.6%.
Foolish takeaway
I believe each LIC has their merits and all are worthy of a place in a dividend-focused portfolio. Clime could be the way to go due to its diverse investment approach and it's trading at the largest discount to its NTA. WAM Research has the best dividend history, however it is trading at a large premium.
