Is the Australian Foundation Investment Co.Ltd. (ASX: AFI) share price a buy for dividends right now?
Lots of investors are searching for yield – hopefully it doesn't all end badly. Maybe AFIC be the answer for those looking for dividends.
What is AFIC?
AFIC is a listed investment company (LIC), it's the biggest and one of the oldest on the ASX. It was established in 1928.
The job of a LIC is to invest in other shares on behalf of shareholders. Most of the older LICs focus on shares on the ASX, though there are some LICs that look at shares listed in other countries.
AFIC is one of the ones that invests in shares on the ASX.
What are AFIC's objectives?
AFIC aims to invest in quality shares for the medium to long-term that pay fully franked dividends whilst making sure that the portfolio is diversified.
The LIC doesn't try to 'trade' business cycles and aims for businesses that can withstand those business cycles. Those businesses should have good management, boards and attractive financial metrics.
All of this should hopefully lead to a stream of franked dividends which grows faster than inflation, which is how AFIC wants to reward its shareholders.
It provides this investment exposure with a management cost of just 0.13% per annum, with no performance fees. This is very cheap compared to most other managed investment businesses.
What are AFIC's largest holdings?
Its top five holdings are very recognisable, they 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).
Looking at the holdings by sector with more than a 5% weighting: 19.2% of the portfolio is invested in banks, 15.9% is invested in industrials, 15.5% is invested in materials, 14.3% is invested in healthcare, 8.7% is invested in other financials and 5.3% is invested in consumer staples.
How has AFIC performed?
Over the past year AFIC's performance has improved against the ASX 200 Accumulation Index. Including franking, the past 12 months shows that AFIC's net asset per share growth plus dividends return of 28.5% outperformed the ASX 200 Accumulation Index by 1.9%.
However, the past five years still show that the ASX 200 Accumulation Index's gross return performance was 1.3% higher per year than AFIC's return and over the past 10 years AFIC underperformed the gross index return by 0.3% per year.
Is AFIC a buy?
AFIC has been fantastic at delivering consistent dividends. It has maintained or grown its dividend each year this century.
If it can continue to outperform the index then it's worth a spot in an income-focused portfolio with a grossed-up dividend yield of 4.8%.
However, it's uncertain if AFIC can keep outperforming. It's currently trading at a premium to its net tangible assets (NTA) again, so it's not a bargain. One of the other older LICs trading at a discount or an ASX-focused exchange-traded fund (ETF) might be a better buy for income today.
