The Best LICs for Dividend Investors
Imagine if, upon waking up this morning, the Australian Stock Exchange (or the New York Stock Exchange, or the London Stock Exchange) had decided that for one day only, top quality companies were on sale for 10-15% off! If you are like me, you would be dashing to your computer to snap up the companies on your watchlist for bargain prices. I’d hope that after you had filled your boots that you would give all your friends a call and invite them to the party too! Unfortunately for both you and me, this has not and will not never happen. Interestingly though, by investing via Listed Investment Companies (LICs), you will occasionally be able to snap up professionally managed portfolios for 10-15% lower than their stated net asset value! Buying an income stream at 10-15% off is a bargain in my opinion, and this article highlights 5 of the best LICs for Dividend Investors that you should watch closely for any opportunity to buy at a discount to net asset value (NAV) or net tangible assets (NTA).
How often do LICs Trade at Discounts?
More often than you might think! Below is an older chart that highlights the substantial discount that some of these funds can trade at. Morningstar produces a monthly list of discounts and premiums to NTA here; note that you will have to impute the LICs NTA moves daily but is reported just once per month.
The Best LICs for Dividend Investors:
The “Old Generals”
Some LICS in Australia have existed for greater than 50 years. Australian Foundation Investment Company, Argo and Milton Investment Corporation possess excellent long term track records, long histories of paying a rising stream of fully franked dividends and extremely low management fees.
Australian Foundation Investment Company (AFI)
First listed in 1962, AFI prides itself on taking a medium to long term view of high quality Australian companies. AFI’s 10 year return of 6.0% per annum (NTA per share growth plus dividends) compares favourably the the ASX200 Accumulation Index’s return of 5.2%, with AFI’s share price return even better at 6.3% per annum. Management fees are just 0.16% per annum, and the company offers a dividend reinvestment plan (at a discount of 2.5%) to help you snowball your investment. In addition, AFI has a long term tendency to provide opportunities for shareholders to increase holdings via a share purchase plan, with no brokerage, and often at discounts to prevailing NTA. The portfolio is approximately $6.5b in size, and the vast majority of this portfolio sits in the ASX top 20. In my opinion, this and Argo are the best options for those looking for vanilla Australian equity exposure with an attractive stream of long term dividends.
Milton Corporation (MLT)
MLT is the other large LIC that has a long history, having first listed in 1962 as well. The company has a stated objective to generate a growing income stream for shareholders in the form of fully franked dividend yields, which is exactly what we are looking for as dividend growth investors. Saying that and actually achiving that are two different things – luckily, the dividend history chart shows us that MLT has been successful at growing the income stream over time. Like AFI and ARG, MLT has a high weighting to the ASX top 20, in particular the big 4 banks. Also interesting is the large holding in WH Soul Pattinson, hinting at this LICs long association with the Millner family. Portfolio turnover is extremely low, and management fees are just 0.13%. As with AFI, share purchase plans and dividend reinvestment plans allow investors to increase holdings in an attractive manner. Over the last ten years, Milton’s TPR (total portfolio return) of 5.6% per annum is ahead of the index’s performance 5.26% per annum.
The New Breed:
BKI Investments (BKI)
BKI is another Millner associated company, with a long term investment strategy. BKI seeks to invest in well managed businesses with the expectation of sound dividend and distribution growth. I like BKI for its focus on industrials (businesses not including property and resources), although this is not explicitly stated. The requirement for sound dividends and distribution growth sees BKI typically avoid the materials sector. BKI’s management expense ratio is 0.16%. Again, portfolio turnover is extremely low, and BKI has a history of paying increasing dividends (although short by comparison to MLT and AFI!).
10 year share holder returns and Portfolio return are 1.7% and 0.9% above benchmark, respectively. This is an excellent result, and delivered without excessive fees, which is a great boon to investors. As with AFI,MLT and ARG, BKI also has the option of subscribing to share purchase plans and DRP’s to increase holdings in an effective manner.
Whitefield is perhaps the outlier of the bunch. The company has been around since 1971, and is focused on investing in just industrial companies. WHF defines industrials as all companies ex-resources, and therefore aims to generate investment returns in excess of the All industrials Accumulation index over the long term. WHF seeks to hold investments which are “realistically capable of generating robust and sufficient rates of return over a few years”. This is slightly different to the more dividend focused nature of the other LICs discussed thus far, but this strategy has nonetheless been relatively effective. Over three years, both the portfolio and net asset backing has outperformed the benchmark by approximately 1% per annum, yet WHF typically trades at a discount to NTA. This may be because WHF is a relatively small LIC at just $360m and can be relatively illiquid, but long term holders can use this to their benefit. Management fees remain low at just 0.25%, and WHF is currently trading at a discount to NTA of approximately 10%.
QV Equities (QVE)
QV Equities is the LIC that mirrors well regarded investment management firm Investors Mutual’s unlisted fund, which focuses on companies outside the ASX Top 20. Investors Mutual has a long track record of adding value in this space. As well as long term capital growth, QVE is focused on long term income growth. QVE looks for companies that pay sustainable and growing dividends with active franking credits.
Having listed relatively recently, QVE has not been in existence long enough to judge either its track record for returns or for dividend payments. The unlisted equivalent has a track record of both outperforming and growing the income stream over the long term. QVE has by far the largest MER of the list at 1.09%, but provides an important diversification benefit due to the focus on stocks outside the Top 20.
In this bucket, I place funds which have either large performance fees (The Wilson Asset Management stable of funds – Wilson Active (WAA), Wilson Research (WAX) , Wilson Capital (WAM)), some liquidity issues (Australian United Investment Company – AUI) and funds with predominantly overseas exposure (Future Generation Global (FGG) + Global Value Fund (GVF)). All of these funds are worthy additions to a portfolio at the right price – but I personally only buy these funds at a discount to NTA. I certainly won’t be looking to add to them at NTA or above NTA. Nonetheless, some of them have exceptional performance (Wilsons), a long term track records of paying fully franked dividends (AUI + Wilsons) or some other portfolio diversifying benefits which could be very attractive long term (FGG, GVF).
The Wilson Asset Management stable has excellent performance, with all funds trouncing benchmarks over the medium term. In addition, the company seems to be very cognisant of the need to deliver a growing stream of fully franked dividends to holders of the various LICs. I would be far more positive on these LICs if the fees were not as high. Unfortunately, the performance fee is far too high for my liking, excellent performance or no.
Global Value Fund (GVF) is an extremely interesting LIC. The strategy of the fund is one that I am extremely fond of – LIC NTA discount capture! Essentially, GVF aims to invest in funds with a discount to NTA and then act to close the discount. Unfortunately, GVF has a fee structure that is reasonably unattractive, but I would look to GVF as an excellent diversifier at the right price. Also, don’t let the name fool you – this one is part of the Wilson’s stable as well, with the Chairman being Geoff Wilson.
Australian United Investment Company (AUI) has the same sort of pedigree as some of our Old Generals – an extremely long operating history, low management fees and a history of paying fully franked and increasing dividends over a number of years. AUI’s dividend chart is one of the prettiest charts I have seen in a while! Due to a lack of awareness and poor marketing, AUI has relatively low liquidity and traditionally trades at a reasonable discount to NTA. This is not really a problem for dividend focused investors but can give some other investors pause.
Future Generation Global (FGG) is a LIC that I have my eye on for international diversification. The company expects to have underlying exposure to 10-20 investment managers with a range of investment styles and strategies. FGG’s underlying managers will largely be international equity managers. The underlying managers have waived both management and performance fees, with 1% of FGG’s NTA each year marked for donation to charities which assist young Australians with mental health issues. The company has not been listed for a long time and has only paid a single dividend but sister fund FGX (a similar strategy but focused on domestic equities) has paid a flat thus far but fully franked dividend stream since Oct-2015. Notwithstanding performance and dividends, I think this is an outstanding initiative and everyone involved is to be commended!
Why consider the contenders?
The best five LICs that I have identified unfortunately have a large degree of overlap in the top 10 holdings (see below). The contenders typically hold different portfolio’s from the other LIC options and may provide additional diversification benefits.
In addition, these LICs may also occasionally trade at large discounts, in which case they may provide opportunities for savvy investors to purchase long term dividend streams at significant discounts.
What if the discount continues to widen?
If you have chosen your LICs carefully, then you should welcome a temporary widening of a discount to NTA. For liquid and diversified funds with a long history of paying dividends, LICS available at discounts are generous gifts, provided you do not need to sell while the discount remains.
In fact, long term investors benefit from LIC discounts – it is the seller of the LIC that loses value. A LIC discount is favorable to investors who want equity exposure at a discount. If the discount continues to widen, you should consider purchasing more of a high quality dividend stream at a discount.
Buying high quality LICs and reinvesting the growing dividend stream has been a well kept secret to achieving wealth for some time now. In particular, the ability to top up holdings when these companies are out of favour, in order to get access to these income streams at discounts to NTA, means that the compounding effect is turbocharged for savvy investors. With LICs seemingly in fashion currently and many new offerings coming to market, it may be that substantial discounts are some time off – but I would encourage you to keep your eyes peeled for potential opportunities in the future.
Do you have a favourite LIC that I’ve left of the list? Which one is it? Is there something else I should have my eyes on? Let me know in the comments.