WAM Research Limited (ASX: WAX) shares are currently trading for $1.40, giving WAX a dividend yield of 6.93% on current prices, or 9.9% when including franking credits. This is a substantial yield, and one of the largest you could get on the ASX (with a relative degree of safety anyway). So should you buy WAX for this huge yield? Or is there something wrong with this picture?
A refresher on WAM Research
WAM Research is a listed investment company (LIC) run by Wilson Asset Management, who operate a stable of six LICs. Founded in 1999, Wilson Asset Management's flagship LIC – WAM Capital Limited (ASX: WAM) has delivered a performance of over 16% per annum since 1999. WAM Research has been around in its current form since 2010 and has also delivered an enviable performance track record since then of 16.4% per annum.
WAM Research focuses on undervalued, small-to-medium-sized industrial ASX companies in building a diversified portfolio that also yields a rising stream of fully franked dividends. As of 31 May, some of WAX's top holdings include InvoCare Limited (ASX: IVC), Xero Limited (ASX: XRO) and A2 Milk Company Ltd (ASX: A2M).
WAX on or WAX off?
Although WAX has a pretty stellar record, there remain a few issues that I would find troublesome in opening a position in WAX.
Firstly, the share price of this LIC is currently trading at a hefty premium to its net tangible assets (NTA). As of 31 May, WAX had an NTA of $1.19 per share, which means that the shares (at $1.40) are asking a 17% premium to what they are actually worth. This is not uncommon with LICs, but 17% is lot of ground to make up and will likely take some time.
Secondly, although WAX's performance has been stellar since 2010, in more recent times, WAX has underperformed the All Ordinaries Total Return Index (XAOA) over 6 months, 1 year and 3 years. If this trend continues, its unlikely WAX will be able to sustain its juicy dividend at its current yield for too much longer.
Foolish takeaway
Although WAX has proven that it has an effective investment strategy, I would be disinclined to invest today at WAX's current premium until I see a return to outperformance. Although its current yield is attractive, I remain unconvinced it will hold up over the next 5 years at these rates.
