Is it possible to beat the market with just the dividend income from some ASX shares?

Over the long term the share market has returned an average of 10% per year, so if you can find a share giving a 10% yield then that may cover all the returns needed. There is a slight caveat with this in that the 10% yield I am referring to includes franking credits.

However, higher dividend yields usually indicate that there is a higher level of risk for one reason or another.

3 ASX Shares With Dividend Yields Above 10%

National Australia Bank Ltd (ASX: NAB)

NAB has a dividend yield of 11.2% when franking credits are included. All of the big four ASX banks have big dividend yields, but NAB has the biggest one.

There are two main reasons for its high yield – it has a high dividend payout ratio of 86% of FY18 underlying diluted cash earnings per share (EPS) (which excludes restructuring and Royal Commission remediation costs).

The other reason for the high yield is that it’s trading cheaply. Using that same underlying cash EPS metric, it’s valued at 11 times FY18’s earnings.

However, there is the potential for a dividend cut if earnings don’t improve, particularly due to the Royal Commission and falling house prices.

Nick Scali Limited (ASX: NCK)

Nick Scali has a dividend yield of 11.3% including the franking credits. Despite a recent profit increase, the Nick Scali share price is down 13.5% over the past year.

The furniture retail has significantly increased its dividend payout ratio to achieve a higher dividend yield, the half year dividend payout ratio represented 80% of earnings. Nick Scali is also valued cheaply at 12 times FY18’s earnings.

The danger is that the significant slowdown of revenue growth continues, which could lead to a fall in earnings and a dividend cut.

WAM Research Limited (ASX: WAX)

WAM Research is a listed investment company (LIC) operated by fund manager Wilson Asset Management.

It has a dividend yield of 10% including franking credits, based on the newly announced dividend payment. This LIC pays out nearly all of the gains it makes from its portfolio in the form of fully franked dividends and is valued at a large premium to its underlying assets.

There is a risk that you are overpaying for the assets, that the investment team could underperform the market (particularly after fees) into the future and that market falls could lead to a dividend cut.

Which is the best one?

At the current valuations and in the current place in the cycle, I’m not sure any would be a buy. Taking price out of it, I’d much prefer to own WAM Research shares but because it’s so expensive I don’t think I’m a buyer today.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).