For income investors who simply want to be passive in nature, buying a FTSE 250 An index tracker that distributes dividends is one way. However, I know many who prefer to choose FTSE 250 stocks. One advantage is the ability to increase the average dividend yield. So is it possible to buy several stocks with a yield that is twice the index of 3.25%? Definitely.
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Sorting carefully
There are currently 27 stocks that fit the first filter of having a yield of 6.5% or more. However, I don’t believe all 27 are worth buying. Others in that mix are currently high yielders because their share prices have fallen 30% or more in the past year. This has artificially increased the yield, but I think business problems may lead to budget cuts in the near future. Therefore, an investor may want to avoid those companies.
Within the sustainable yield group, the next thought is which sectors do I like? A company may have a good record of paying income, but if I think the sector will not perform well in the coming years, it may not be a good choice. In my opinion, finance, telecommunications, and renewable energy are three areas that will do well in the coming years.
After adding in that sector filter, I can now clearly see high yield companies operating in an area that I think will do well. This is a sweet place. According to individual names included in this bucket, The Ashmore Group (6.88% yield) Telecom Plus (6.95%) and Greencoat UK Wind (10.98%) all can be imagined.
Ideally, an investor would look to include this as part of a larger diversified portfolio. The advantage is that if one company lowers its dividend in the future, the entire negative impact on the portfolio is controlled.
Digging deep
Another example to consider is this TwentyFour Income Fund (LSE: TFIF). The stock is flat over the past year, but has a great yield of 9.85%. Fund managers focus on buying asset-backed securities, such as auto loans, mortgages, and other types of consumer debt.
These securities pay a high coupon, given that the risk of these loans is usually higher than that of conventional loans. However, the fact that the loan is covered by assets such as cars and houses means that even if a person defaults, it can help recover some of the losses. It holds 173 investments as of the company’s latest update, reflecting a diversified portfolio.
As for dividends, the company pays almost all of the profits it generates each year to shareholders. That means dividends are funded mostly by interest on real money, not cash. That is an important factor in keeping it sustainable going forward. In addition, the company has met or exceeded dividend targets every year since its launch in 2013! Therefore, while past performance does not guarantee future returns, the track record speaks for itself.
In terms of risks, the debt and bonds purchased depend on the health of the consumer and the business. So if we experience an economic downturn due to high unemployment or housing stress, it may result in significant loan losses.
Even with those concerns, I think it’s still a high-yielding dividend stock for investors to consider.
