If you have read Scott Pape's best-selling book The Barefoot Investor, you might have heard of the Australian Foundation Investment Co. Ltd. (ASX: AFI) or AFIC for short.
AFIC is a Listed Investment Company (or LIC), which in short means that it is a company whose purpose is to invest in other companies. When you buy a share in a LIC, you are effectively buying into the shares of other companies that the LIC owns. This is similar to how investing in Exchange Traded Funds (ETFs) works, but instead of the trust structure that underpins an ETF, a LIC is a fully-fledged company of which a share represents part-ownership.
So that brings me to AFIC. AFIC is one of the oldest LICs in Australia, founded way back in 1928. It is known as a conservative, safe-and-steady kind of company that aims to match or outperform the S&P/ASX200 Accumulation Index over the business cycle, whilst generating a rising stream of fully-franked dividends.
I agree with Mr Pape in that AFIC would make a great investment for a beginner, because you are getting exposure to some of the best companies in Australia (selected by a professional management team) in one share, with no need to do any stock-picking yourself. Some of the top shares that AFIC currently holds include the Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP) and CSL Limited (ASX: CSL).
So as you can see, an AFIC share represents some of the biggest blue-chip companies on the market.
AFIC's management fee is 0.14%, which is extremely low compared to other LICs out there and most ETFs for that matter. This matches the management fee of the Vanguard Australian Shares Index ETF (ASX: VAS), which represents the total Australian market. Although AFIC has underperformed the index over the last few years, I believe it is still a good investment for both new investors and income investors.
Foolish takeaway
Whilst I would tell a new investor that either VAS or AFIC would be a good pick, I still believe AFIC would be a better option for someone chasing income. This is because AFIC offers a higher and fully-franked dividends, whereas the VAS distribution yield is only partially-franked. Whilst this might be rendered redundant by the proposals of the Labor Party in regard to unused franking credits, I believe it is still an important differentiating factor in the choice between these two potential investments.
