When I next have some spare cash I’ve decided I’m going to buy FTSE 250 stock TwentyFour Income Fund (LSE:TFIF).
A 9.7% yield puts this fund in the top six out of 250 UK companies. And the fund trades on a cheap price to earnings ratio of 6.2.
And it’s not because the share price has crashed, pushing the yield to unsustainable levels.
Price vs yield
Dividend yields are measured as a percentage. They move in the opposite direction to share prices. So if a company is troubled and investors are selling out fast? Dividend yields can skyrocket.
The shares are still 15% cheaper than they were five years ago. But the price here has been climbing since October 2022.
How big is it?
At a £785m market cap, this fund is not a market minnow. It is on the smaller side for FTSE 250 companies, which may impact liquidity. So that’s something to be aware of.
If you’ve not heard that phrase before — liquidity? That means there are enough buyers that I can sell as much as I want, for the price as listed.
What it does
TwentyFour Income Fund invests in ‘asset-backed securities’. The securities are contracts to pay: like car loans, credit card receivables, or business loans. They can include mortgages as well.
Now — if you’re a student of financial market history or you like The Big Short movie, that phrase might set off alarm bells.
Banks overselling risky derivatives of mortgage-backed securities were partly responsible for the great financial crisis.
Ask anyone who was there, with banks failing and wealth disappearing before our eyes. You will get the same answer: no-one wants to go through that again.
Honours even
But I wouldn’t lump in all of these things as being exactly the same. It depends on how the people that run the fund manage the risks of the products they own.
If I’m investing my hard earned cash in a new fund or company? You can bet I’m going to spend at least couple of months investigating them. Being a bloodhound. Tracking down management and seeing who they are and what they stand for.
NAV-igation
Now, the net asset value of the asset-backed securities this fund owns? It’s about 106.1p per share, as of 5 February 2024.
And the share price? 105.8p.
What does this tells me? The fund is not trading at a massive premium, nor a huge discount.
Should I wait until the price falls a bit, to try and get ahead of the market?
Maybe. But there’s no guarantee that will happen. Even if we do enter a recession and people find it harder to pay off personal or business loans.
Risk vs Reward
Right now, I can’t see many other reasonable ways to generate a 10% yield from my money.
That is, without betting at a blackjack table in the local casino, or chucking cash down the drain on risky sports bets.
I would say this is definitely a higher risk investment than a FTSE 100 company. But if you’re looking for 10% yields, then you probably know that already. Risk and reward are two sides of the same coin.
