Ann: FY2025 Interim Results Q&A Webinar, page-12

WAM Capital Ltd (ASX: WAM)

WAM Capital is a listed investment company (LIC) that is particularly popular amongst retirees and other dividend investors on the ASX. This is thanks to this LIC's long habit of paying out fat dividend payments to its investors. Looking at this company's current dividend yield, and it's not hard to see why. WAM Capital has paid out two dividends over the past 12 months, both worth 7.75 cents per share.

At the current share price of $1.64, these two payments give this LIC a trailing dividend yield of 9.45%. Pretty compelling, right?

Well, things don't look quite as rosy if we scratch the surface a little.

In its most recent monthly update, WAM told investors that its profit reserve (from which it funds dividend payments) was sitting at 24.9 cents per share. Given the company doled out 15.5 cents per share in dividends last year, this means that WAM Capital only has enough cash to fund another 18 months of dividend payments or so. Unless the company is able to generate enough revenue to expand this reserve, this dividend looks like it is on shaky ground.

Of course, WAM can always sell its underlying holdings to generate cash to fund this generous dividend. But this strategy can backfire. Over the past four years or so, WAM Capital shares have dropped by more than 23%, indicating that the company is sacrificing its capital to fund its dividend payments. That's not exactly a recipe for long-term success.

As such, I think there is a high risk that buying WAM Capital shares today will result in a dividend trap situation.