The FTSE 250 is up 18% in little over three months, a strong sign that the correction last year was mere investor panic. We’re still some way off all-time highs, so if the tide is turning then now could be a great chance to pick up some undervalued stocks. Here’s one with a superb dividend yield that has caught my eye.
Dirt cheap stock?
The company is called Sequoia Economic Infrastructure Income Fund (LSE:SEQI) and looks for investment opportunities in a range of different sectors. It’s highly diversified, which is great for low-risk investors such as myself. For example, when it looks at construction projects, it has a limit of no more than 20% of its total capital.
The share price has taken a tumble since the pandemic. The fund is currently down 27.4% from its all-time high in January 2020. Is it undervalued? Here’s what I think.
An excellent dividend yield
Sequoia’s core business model is to provide financial loans for a wide range of infrastructure projects. That might mean a new offshore wind farm off the coast of Scotland or a modern student housing block in the Netherlands.
The company finds value in sectors that put off traditional lenders, usually because risk assessment is difficult. That said, all projects are located in countries in Western Europe or Anglophone countries like the US and Australia.
The dividend yield is currently at an impressive 7.9% and the company stated in its latest tradings update that it wants to “hold the payout at its current level”.
The portfolio yield for 2022 – the amount the fund generates from investments – was 8.4%, which is in line with its target of 8%-9%. This covers the current dividend yield comfortably. And there is good news in the company’s future, too.
A rosy future?
A potential catalyst is the ongoing increase in interest rates. High interest rates are good for lenders. As the fund lends money, an interest rates rise can increase the net income. In fact, Sequoia themselves state: “These higher interest rates will, all things being equal, result in an improvement in the cash dividend cover ratio. Over time, this may lead to NAV growth, or the opportunity to increase the dividend, or both.”
Interest rates are already at 3.5% in December 2022 and 10.5% inflation seems like it will cause further rises. And with the pandemic now firmly in the rear-view mirror, macroeconomic trends look rosy for lenders like Sequoia.
Is it a buy?
As Sequoia is a dividend stock, it seems unlikely we’ll see much growth here. And my strongest argument against Sequoia is that with the strong recent FTSE 250 performance, I’m seeing fantastic growth opportunities left, right, and centre.
Of course, a diversified portfolio is always a good thing. And with Sequoia offering a high dividend and attractive value, I’ll look to open a position next time I have spare cash available.
