Whenever ASX dividend investors see a popular income stock with an 8.7% yield, it’s enough to make most stop and take a second look. Particularly if that 8.7% yield comes with franking credits too.
That’s exactly what is on display right now from WAM Capital Ltd (ASX: WAM).
WAM Capital is a listed investment company (LIC) that has been around for more than 25 years. Like most LICs, it holds a portfolio of underlying shares that it owns and manages on behalf of its investors.
In WAM’s case, this portfolio usually consists of small to mid-cap ASX shares which WAM’s team views as undervalued, or else poised to benefit from some kind of pricing catalyst. When the value rises, or the catalyst is realised, the shares are often sold, and the profits banked, ready to be passed on to investors through franked dividends.Â
Over the past 12 months, WAM Capital shares have paid out two dividends, both worth 7.75 cents per share. That annual total of 15.5 cents per share is the level of income that this company has paid out for eight years now.Â
These dividends used to come fully franked, but WAM Capital has lost the ability to fund full franking credits in recent years, with 2025’s two payments coming partially franked to 60%.Â
Even so, at the current WAM Capital share price of $1.79, the company trades on a trailing yield of 8.67% today.
However, I think there’s reasonable cause to believe that this popular ASX income stock could be a dividend trap.
How might this popular ASX income stock be a dividend trap for investors?
A dividend trap is the dreaded term used to describe an income stock that seemingly promises a high level of payouts, only to rob investors of capital down the road by either dropping significantly in value or cutting its dividends (or both).
The first red flag comes from WAM Capital’s profit reserve. At the end of October, WAM reported that it had just 21.1 cents per share left in its profit reserve. That’s not enough to cover its annual dividend for longer than one year. If the company has a tough 2026, that reserve could fall even further.
Secondly, WAM Capital’s actual share price performance has been horrendous. At $1.79 today, the company is trading almost 30% lower than it was in early 2017. Furthermore, you could have purchased this company’s shares at the same price they are currently going for today as far back as 2006. That’s two decades of zero capital growth, and an awfully long time to tread water.
All the while, the company is taking hefty management fees worth at least 1% per annum from its investors.
Putting all of this together, I believe there are numerous cheaper and lower-risk shares that income investors can opt for instead of WAM Capital at present. Even a simple ASX 200 index fund would have been a better investment than this LIC over the past ten years.
The post Why this popular 8.7% income stock could be a dividend trap appeared first on The Motley Fool Australia.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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