Yesterday, WAM Capital Ltd (ASX: WAM) paid out a 7.75 cent per share dividend to its shareholders. If you annualise this payment, it gives WAM shares a trailing, fully franked dividend yield of 8.36%. This yield rises to 11.94% if you include the value of the full franking credits that come attached.
In an era of low interest rates and bank dividend cuts, this ASX dividend share might look very appealing to a lot of investors. And for good reason – it's a yield far above what the broader S&P/ASX 200 Index (ASX: XJO) is currently offering – along with most shares within it.
Who is WAM Capital?
WAM Capital is a listed investment company (LIC) that focuses on small and mid-cap undervalued growth companies on the ASX. Some of its current holdings include the A2 Milk Company Ltd (ASX: A2M), Breville Group Ltd (ASX: BRG) and Domino's Pizza Enterprises Ltd (ASX: DMP).
It has a long and proud history, delivering an average return of 14.9% per annum (before fees) since its inception in 1999.
But as they say, past performance is no indication of future returns. So is WAM Capital still worth a buy today, if not just for pure dividend income?
Is WAM Capital's dividend safe?
Things get a little murkier on this company if you sift into the fine print a little more, in my view. WAM Capital reports that as of March 31, 2020, the company had a profit reserve of 13.9 cents per share.
Well, the company just paid out 7.75 cents of that reserve as a dividend yesterday, which means that the profit reserve would now stand at roughly 6.15 cents per share.
See the problem here? WAM Capital now has to hope for a stellar few months if it hopes to continue paying dividends at its previous levels – it doesn't even have enough cash to cover a 7.75 cent final dividend in 2020 right now (and let's not even talk about 2021).
In the current investing environment, I'm not too confident it will manage this successfully.
Foolish takeaway
I'm not confident WAM Capital has enough gas left in the tank to fund a substantial dividend going forward. Therefore, I don't think it's a great buy today for a dividend share for 2020 and beyond, despite its proud history.
Other ASX dividend shares, as well as even some of WAM's other LICs, have far better prospects for income investors today, in my view.
