Is the WAM Capital Limited (ASX: WAM) share price a buy for the grossed-up dividend yield of almost 10%?
It's hard to find shares on the ASX with such high dividend yields these days. People are searching for yield because of the RBA's interest rate cuts which have pushed share prices up and dividend yields down. I don't think shares like Sydney Airport Holdings Pty Ltd (ASX: SYD) and Transurban Group (ASX: TCL) are the answer because of how expensive they are.
WAM Capital is the oldest listed investment company (LIC) in the Wilson Asset Management stable. Its job is to invest in ASX shares and try to generate good returns whilst protecting shareholder money.
It has been a strong performer since inception in August 1999, producing an average return per annum of 16.7% before fees, expenses and taxes.
FY19 was a tough year, but FY20 has been good for the WAM Capital portfolio to the end of August 2019, outperforming the S&P/ASX All Ordinaries Accumulation Index by 3.4% before fees, taxes and expenses.
WAM Capital increased its dividend each year since the GFC up to FY19 and then maintained the dividend last financial year. It's a solid dividend track record at a consistently high yield.
But growing the dividend requires a high level of investment performance, otherwise WAM Capital would deplete its profit reserve, which was down to 13 cents per share at the last disclosure.
But, WAM Capital is currently valued at a 20% premium to its pre-tax NTA. This is quite expensive – it's better to buy things at a discount, like Geoff Wilson has been doing with WAM Leaders Ltd (ASX: WLE).
Foolish takeaway
Whilst WAM Capital is certainly one of the better performing LICs I think it's trading at a too high premium to buy today, and its profit reserve is lower compared to another WAM LIC like WAM Research Limited (ASX: WAX), which could be a better idea for income.
