Most investors want to make sure that their money is working as hard as possible. A Cash ISA is one way of generating interest, with some easy-access ISAs paying around 4.5%. However, for those that are happy to take on some extra risk, dividend stocks can yield much more. In fact, this FTSE 250 stock has a current yield over double the Cash ISA rate!
Looking to Asia
I’m talking about Henderson Far East Income (LSE:HFEL). It has a current dividend yield of 9.55%, with the share price also up 12% in the last year.
At 9.55%, it’s one of the highest-yielding options on the stock market. The portfolio managers invest in a diversified portfolio of dividend-paying companies across the Asia Pacific region. The income generated by these stocks is then passed on to shareholders.
Therefore, the high yield partly reflects the generous dividends paid by many companies across Asia, particularly in sectors like financials, telecommunications and energy. The trust also enhances income by selectively using leverage and other strategies to boost the cash available for distributions.
As an investment trust, it can retain income in stronger years and use those reserves to support payouts during leaner periods, which has helped it increase its dividend for 16 consecutive years. It typically increases the quarterly payment by 0.05p each year. For example, the past four dividends were 6.25p per quarter, with the most recent declared dividend bumped to 6.3p.
A sustainable yield
I think the slow-and-steady increase in the dividend per share can continue in the coming years. Asian stock markets in general still have cheaper valuations than places like the US. Therefore, I think the trust price isn’t that exposed to a sharp drop any time soon.
Another encouraging point is that it offers diversification to UK investors. Even though the stock is listed on the FTSE 250, the income isn’t determined by the health of the UK economy. This makes it attractive to help offset some other income stocks an investor might hold that are more sensitive to the goings-on at home.
If we do see the dividend per share tick higher again to 6.35p next year, this could push the divdiend yield to 9.7%. Of course, we don’t know where the share price will be at that point in time, so the actual yield could be higher or lower.
Stocks versus cash
There are risks involved with stocks that investors simply don’t get with a Cash ISA. A meaningful proportion of the portfolio is invested in emerging markets, where political uncertainty can quickly affect returns. By contrast, there’s no risk with a Cash ISA of capital fluctuations.
In particular, China remains an unpredictable market, while any slowdown in global trade could hurt export-focused Asian economies. Yet even with these risks, I’m seriously thinking about adding the stock to my portfolio to enhance my yield, and feel like-minded investors could consider doing the same.
Should you invest £5,000 in Henderson Far East Income right now?
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Jon Smith does not hold any positions in the companies mentioned
