For an investor, looking at a stock’s dividend yield can be a quick and easy way to compare it to other income-yielding assets. Naturally, the risks associated with dividend stocks is different to other cash generating assets. Yet for stocks with a high-yield, the risk can be potentially worth it.
Here’s one idea to consider.
Hunting for income sources
The stock’s EJF Investments (LSE:EJFI). With a market-cap of £72m, it’s well outside the FTSE 250. Over the past year, the share price has jumped 30%. Yet even with this, the dividend yield’s still very a very attractive 9.3%.
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Let’s run through what the company does. It owns a diverse portfolio of assets that provide risk-adjusted cash flows, the bulk of which are paid out in the form of quarterly dividends. These assets include bonds and other debt issued by banks and insurance companies.
Some might think the business model sounds a little simple and that they could replicate it themselves. I disagree. As the company’s classified as an institutional investor, it can access more complex debt products and derivatives an ordinary investor wouldn’t be able to buy.
Further, the investment manager’s skill comes from buying the right type of bonds that have an appropriate level of risk relative to the income potential. Again, this is an area that needs expert knowledge and isn’t something many retail investors would have.
A high yield
Aside from the fund assets, another advantage of buying the stock is the income potential. The yield’s clearly high, but I don’t think it’s unsustainable.
For the past few years, the business has targeted an annual dividend of 10.7p a share, but it’s achieved this for several years. The latest half-year report showed the company received income from investments of £4m. And it paid out £3.27m worth in dividends.
So as long as investors don’t pull money out of the fund, I think it’ll have enough income to keep paying out the dividends. However, one risk is that it’s not just the dividends that have to be paid. There are a host of other operating costs to keep the business going. Although it might sound like there’s a large buffer between the income and the dividends due, this isn’t always the case.
Don’t forget about the NAV
Gains could also be seen from share price appreciation. Even with the 30% jump in the past year, the stock still trades at a 26% discount to the net asset value (NAV) of the investments held.
I’m not going to say that this means the stock will jump 26% tomorrow. But in the long-term, I’d expect it to move higher to close this gap.
The small-cap nature of the stock might put off some investors, with the high yield also causing some to be cautious. Even with this, I think it’s a share investors could consider having a small allocation in.
