At this share price, is AFIC a great buy for the long-term?

Is Australian Foundation Investment Co.Ltd. (ASX:AFI) a great buy for long-term returns at this share price?

| 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

At this share price, is Australian Foundation Investment Co.Ltd. (ASX: AFI) a great buy for the long-term? 

AFIC is the largest listed investment company (LIC) on the ASX. The job of a LIC is to invest in other shares.  

What are some of the shares that AFIC owns? 

In order of size, AFIC's biggest five holdings are: Commonwealth Bank of Australia (ASX: CBA), CSL Limited (ASX: CSL), BHP Group Ltd (ASX: BHP), Westpac Banking Corp (ASX: WBC) and Transurban Group (ASX: TCL).  

It also owns shares with more of a growth focus like SEEK Limited (ASX: SEK) and Treasury Wine Estates Ltd (ASX: TWE).  

AFIC dividend 

One of the main reasons to like AFIC is for the dividend. We're 20 years into this century and AFIC has maintained or grown the dividend every year so far. AFIC provides excellent income security. This is great for retirees.  

AFIC currently has an ordinary grossed-up dividend yield of 4.7%. That's pretty good for an investment that provides bond-like income.  

Investment performance 

The last year five years has been solid for AFIC, it has produced investment returns of an average of 10.1% per annum which includes fees, expenses and tax.  

However, the disappointing thing is that the performance mentioned above was an underperformance of the ASX 200 Accumulation Index by an average of 1.5% per year. That doesn't sound like much but it compounds to a sizeable difference over time. You may as well pick Betashares Australia 200 ETF (ASX: A200) which comes with lower costs.  

Is the AFIC share price a buy? 

AFIC is fine as an investment option, it's just that it has underperformed the index in recent years, meaning that a passive exchange-traded fund (ETF) would have been a better option.  

It can still be attractive to buy LICs if you can buy them at a material discount to their net tangible assets (NTA), but now that franking credit worries are over it seems that AFIC is back to trading at a premium again – which isn't attractive in my opinion.  

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Transurban Group and Treasury Wine Estates Limited. The Motley Fool Australia has recommended SEEK 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 Defensive Shares

A couple makes silly chip moustache faces and take a selfie on their phone.
Blue Chip Shares

3 blue-chip ASX shares I think are so safe you could hold them forever

No shares are 'safe', but some are safer than others.

Read more »

Two smiling work colleagues discuss an investment or business plan at their office.
Defensive Shares

Why I'd buy these top defensive ASX shares before Christmas

These stocks could be compelling picks in the next few months.

Read more »

rising asx share price represented by man with arms raised against blackboard featuring images of dollar notes
Defensive Shares

I'll be investing $5,000 in this defensive ASX stock following its first-class result

This is one ASX share that has products customers can't seem to live without...

Read more »

Two mature women learn karate for self defence.
Defensive Shares

2 defensive ASX shares for lower-risk investors

I think any investor can comfortably add these two shares to a portfolio today...

Read more »

Man drinking from a bottle sitting on a floating ring in the middle of a harbour going nowhere.
Defensive Shares

2 ASX shares to confidently buy now and hold forever

Long-term thinking is the key with these two ASX names.

Read more »

Two mature women learn karate for self defence.
Defensive Shares

2 recession-proof ASX shares to buy in August

These stocks could be two of the most defensive on the ASX.

Read more »

a woman pushes a man standing in a shopping trolley pointing ahead far off into the distance.
Defensive Shares

1 reliable ASX stock I'd be as happy as Larry to hold through a recession

Here's my pick for a recession-resistant ASX share to buy today.

Read more »

A man in his 30s holds his laptop and operates it with his other hand as he has a look of pleasant surprise on his face as though he is learning something new or finding hidden value in something on the screen.
Defensive Shares

AML3D share price surges another 38% today! What's going on?

The defence sector is catching some strong bids.

Read more »