Even with the stock market close to a new all-time high, there are still pockets of exceptional income stocks waiting to be discovered – many of which are hiding in plain sight.
The FTSE 250, in particular, seems to be filled with generous payouts right now, with several yields stretching into double-digit territory. But there’s one dividend share with a 7.7% yield that’s caught my eye. And if my hunch is right, that yield could be set to grow even bigger.
Let’s explore.
An emerging market expert
At its core, Ashmore‘s (LSE:ASHM) a specialist emerging markets asset manager. It raises capital from institutional investors (think pension funds, sovereign wealth funds, central banks) and deploys it across emerging market bonds, equities, and alternative assets spanning over 60 countries worldwide.
In exchange, the group earns management fees on the assets it oversees. And when its funds outperform their benchmarks it also collects some lovely performance fees on top.
The result is a business model that’s lean, capital-light, and capable of generating very high margins when market conditions are just right. And in the last few years, that’s exactly what Ashmore has been secretly enjoying.
The hidden bull rally
Looking at Ashmore’s five-year share price performance, you’d be forgiven for thinking emerging markets are in a bit of a rut. Yet the truth’s quite the opposite.
Over the past 12 months, emerging market indices have quietly delivered returns close to 40%, massively outpacing even the tech-heavy S&P 500. And subsequently, Ashmore’s assets under management (AUM) have been climbing with them, reaching $50.7bn as of March – up 9.7% compared to a year ago.
In fact, that’s why when zooming in on just the past year, Ashmore shares are actually up close to 40%, signalling that the recovery may have already started. And with a 7.7% dividend yield on offer, it’s hard not to take a closer look.
A quietly growing cash machine
As AUM grows, so do the opportunities for Ashmore to earn more management and performance fees. And with operating costs largely fixed, that also allows leadership to exercise some impressive operating leverage.
For income investors, that’s exactly what they want to see. Why? Because it means more revenue is flowing to the bottom line to continue funding an impressive dividend.
But of course, none of this comes without caveats. Ashmore’s revenues are entirely dependent on the assets it manages. As such, if global risk appetite deteriorates sharply, the AUM can fall quickly – something we’ve already seen multiple times in the past.
Historically, management’s been able to use the strength of its balance sheet to absorb these cyclical shocks and keep the dividends flowing. But if emerging market conditions suffer too far, the pressure on dividends could prove too high.
So is it worth it?
With energy inflation creeping in across the world due to the war in the Middle East, emerging market economies are exposed to a financial pinch. So far, many are adapting to the new macroeconomic landscape, but investors considering Ashmore will have to get comfortable with the idea of short-term volatility.
Nevertheless, in the long run, this income stock does look nicely positioned to continue thriving within its niche and worth considering. But, in my opinion, there’s an even better opportunity for my portfolio…
What income stock do we like better than Ashmore Group Plc right now?
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Zaven Boyrazian does not hold any positions in the companies mentioned.
