Investment trusts can provide investors with a way to tap into professional money managers without requiring a substantial amount of capital. Some trusts focus on growth, others on income. So when I saw a trust with a dividend yield of 10.72%, I naturally wanted to see how this was achieved and whether it was sustainable.
Details worth noting
The trust in focus is Henderson Far East Income (LSE:HFEL). The manager, Janus Henderson, invests in a diversified portfolio of listed companies across countries such as China, Australia, Taiwan, South Korea, and Singapore. That’s why the listed title focuses on the Far East. When I examine some of the top holdings, I can see they’re diversified at the sector level. Some large stakes include Chinese banks, Korean infrastructure companies and Taiwan semiconductor firms.
Over the past year, the stock’s down 5%. This closely tracks the net asset value of the company, which is essentially the value of the portfolio of stocks held. It will fluctuate going forward, which is a risk for income investors. Yet the purpose isn’t to make large capital gains through the share price. Rather, the trust focuses primarily on income-generating stocks, meaning it seeks out companies with strong dividend-paying potential, which is why it offers a high yield.
Income payments
The trust has a strong track record of paying out quarterly dividends. More than that, they’ve been increasing over the past few years. For example, the total payment in 2020 was 23p. This has risen to 24.6p last year. The quarterly payments are expected to increase going forward, if the forecasts are accurate.
Therefore, when I consider the high yield above 10%, it doesn’t immediately raise concerns. Typically, a yield this high could be due to the share price drastically falling, or some other problem that would likely result in cut dividend payments in the near future. I don’t believe this is the case here.
One concern is the dividend cover, which is currently 1. This means earnings per share are being fully used to pay the dividend per share. Although it shows the income being paid out is fully covered by earnings, it doesn’t leave any room for error. If profits fall, the dividend might need to be reduced, otherwise the cover would be below 1.
Looking ahead
Given that some are flagging that the US markets are overvalued, and the concern around the current state of the UK stock market, I think having exposure to Asia isn’t a bad idea. It could help to diversify my portfolio for the coming year. It’s also an easy way to get exposure, as I’d only need to buy one stock.
I don’t think the dividend yield is too good to be true. Granted, the risk surrounding the dividend cover could mean the dividend per share doesn’t increase significantly going forward. Yet, even if the yield dropped slightly, it remains very attractive. That’s why I’m seriously thinking about buying right now.
