In the world of investing, finding a stock with a high dividend yield that can be held for the long term is a rare gem. Today, I want to delve into the intriguing case of WAM Microcap Ltd, an ASX-listed investment company that offers a dividend yield of over 10%, a figure that immediately catches the eye of any income-focused investor.
The Allure of High Dividend Yields
As an investor, I'm always drawn to the promise of passive income. However, my experience has taught me that the higher the yield, the more cautious one must be. Typically, a high dividend yield indicates that a business is paying out a significant portion of its profits, which may not be sustainable in the long run.
The Unique Nature of WAM Microcap
WAM Microcap is an exception to the rule. Unlike traditional businesses that sell products or services, it operates as a listed investment company (LIC), buying and selling shares to generate profits for its shareholders. This unique business model sets it apart from the typical dividend-paying stock.
What makes WAM Microcap even more intriguing is its investment strategy. Instead of focusing on the S&P/ASX 200 Index, it actively seeks out undervalued growth opportunities in the Australian microcap market. This niche hunting ground is often overlooked by fund managers, making it a potential goldmine for savvy investors.
The Key to Sustainable Dividends
For a LIC like WAM Microcap to pay sustainable, large dividends, it must generate impressive investment returns. And the numbers don't lie. Since its inception in June 2017, WAM Microcap's portfolio has delivered an average annual return of 14.4%, even during a challenging decade for small-cap shares. This track record gives me confidence in the investment team's ability to continue generating returns that can fund future dividends.
A Consistent Dividend Payout
WAM Microcap's board has provided a clear roadmap for dividend payments. They plan to pay an annual dividend per share of 10.7 cents for FY26, resulting in a grossed-up dividend yield of approximately 10.5%, including franking credits. This level of transparency and consistency is music to an investor's ears.
The business has also built a profit reserve of 49.8 cents per share, which means it could maintain its dividend level for over four years without relying on investment returns. This safety net is a testament to the company's financial prudence and commitment to its shareholders.
The Benefits of Small-Cap Exposure
I believe that Australian investors are missing out if they don't consider small-cap shares for their portfolios. These smaller companies offer diversification and the potential for significant returns, especially when managed by a skilled investment team like WAM Microcap's.
Final Thoughts
WAM Microcap's combination of a high dividend yield, consistent dividend payments, and a unique investment strategy make it an attractive long-term holding. While there are other ASX shares worth considering, WAM Microcap stands out for its ability to provide both income and growth potential.
In my opinion, it's a stock that deserves a place in any well-diversified portfolio.
