The FTSE 250 is home to dozens of high-yielding dividend stocks. In fact, there are currently (17 June) 59 of them indicating a potential return of at least 5%.
But investors should be wary. With league tables compiled on the basis of payments made over the previous 12 months, high yields may no longer be available. They may also be a sign that investors are expecting a dividend cut.
However, I’ve found a member of the FTSE 250 that’s been paying decent dividends for several years now. Indeed, it’s offering a return that’s nearly three times higher than that of the index as a whole. Moreover, I think there’s plenty of evidence to suggest that its payout is sustainable.
Let’s see.
Who?
TwentyFour Income Fund (LSE:TFIF) invests in asset-backed securities in the UK, Europe, and Australia. These include collateralised loan obligations (bond instruments issued to fund specific classes of borrowing) and residential mortgages.
Crucially, a significant proportion of the borrowers have poor credit ratings. Admittedly, this puts an investment in the fund at the riskier end of the spectrum. Indeed, the trust itself acknowledges that “sub-investment grade securities will have a higher risk of default, and are generally considered to be more illiquid than investment grade securities“.
But subprime borrowers are charged a premium. And these financial products are secured on assets, which can be sold in the event of default. This gives some protection, although a forced sale may not result in all of the outstanding debt being recovered.
Great for income
The fund’s currently yielding 9.8%. If this were maintained, a £10,000 investment would grow to £21,126 in just eight years. After 15, it would be worth £40,647. Within two decades, it could grow to £64,870. This assumes all dividends are reinvested and ignores any movement in the share price.
However, its near-10% yield could come under threat if defaults run higher than anticipated. Indeed, the fund’s dividend can be erratic. That’s because it returns nearly all of its earnings to shareholders each year. Instead of engaging in dividend smoothing, it operates a full payout model.
Having said that, its 2025 annual payout was 64% higher than in 2020. And while it might not steadily increase every year, I think there’s a good chance that it will remain comfortably above the FTSE 250 average.
Final thoughts
Since inception, the fund’s delivered an average increase of 8% in its net asset value (NAV) per share (including dividends). But don’t expect stellar share price growth. Its market cap is currently close to its NAV.
Looking ahead, the fund sees lots of opportunities as banks have now — due to higher interest rates — returned to more traditional forms of funding, creating a greater pool of assets in which to invest.
Significantly, it invests in asset classes that tend to have variable interest rates. This means its income should move (up or down) in line with changes in central bank rates. This should give it a high degree of earnings protection, assuming the level of bad loans doesn’t get out of control.
For those comfortable with an above-average level of risk, I reckon TwentyFour Income Fund is a high-yielding stock to consider.
Should you invest £5,000 in TwentyFour Income Fund right now?
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James Beard does not own shares in any of the companies mentioned.
