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Income stocks are generally defined as companies that pay attractive dividends. As a result, some investors will use these stocks and build a portfolio focused on generating income through cash payouts. Here is how one can start at the beginning and build things up over time.
Focus on Asia
One assignment that can be considered right now Henderson Far East Income (LSE:HFEL). The investment trust currently has a dividend yield of 9.9%, and the share price is up 10% over the past year.
The business (as the name suggests) focuses on investing in Asian companies with potential for profit. It then aims to distribute a large portion of the earned income as dividends to shareholders. The share price should closely track the value of the trust’s net assets. So the rise in the last year shows the success of the stock selection fund.
Some will criticize the recent performance, saying that if the fund had held more Asians growth stocks, the returns would have been even higher. This is true, but it misses the point of what the trust is for. It is aimed at sectors such as banking and telecommunications that operate in mature areas. Instead of reverse capital growth, it focuses on high-profit areas.
Looking ahead, I think this would do well. Technical ratings are high, so exposure to the most defensive sectors in the market can help protect the trust’s performance if we see a stock market correction.
Building the right portfolio
Let’s say an investor has just opened a Stocks and Dividends ISA to build a second income. The investment limit in an ISA is £20k per year. For the sake of argument, let’s say this £20k is allocated to all of Henderson Far East Income. In theory, next year, this could pay £1,980 in cash.
In the long run, I don’t think it makes sense to put everything in one income stock. The company has risks. For example, it focuses on just a few sectors, and in the Asian region. If this part of the world experiences a slowdown due to China or emerging market volatility, it is dangerous.
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But that doesn’t mean the ISA won’t aim to generate an average yield of 9.9%. There are other yielding stocks in this region. If an investor includes other shares in the portfolio alongside Henderson Far East Income, it can serve to diversify the risk.
After ten years of maintaining an annual investment of £20k, the portfolio could generate more than £39k in the following year. Of course, this is not guaranteed, as benefits may be reduced in the future. This can mean that it takes longer to achieve a certain income goal. However, it clearly shows the potential of growing an empty ISA with the right strategy.
