When searching for passive income stocks, it’s easy to be swayed by high dividend yields. The higher the yield, the more the income, right?
Technically, yes. However, relying solely on the yield can end in disaster if the company lacks a reliable dividend track record. That’s why this lesser-known UK stock with an 11.4% yield and 17 years of uninterrupted dividend growth caught my attention.
But is there more to the story?
Henderson Far East Income
Henderson Far East Income‘s (LSE: HFEL) a British investment trust that isn’t on the FTSE 100 or FTSE 250 yet. For that reason, it’s flown under my radar for some time.
As the name suggests, it invests in major East Asian companies such as TSMC, China Construction Bank and Alibaba. It invests mostly in financial services and technology, with 20% of assets in China, 15% in Hong Kong, 12% in South Korea and the rest spread across the region.
The trust’s commitment to delivering a high and growing income’s evident in its consistent dividend policy, with payments fully covered by revenues. Recently, its revenue reserves have reached an all-time high, providing a cushion for future payouts. This reliability’s particularly attractive for investors seeking a steady income.
Capital growth prospects
While HFEL’s primary focus is income, it also aims for capital growth. In the year to October 2024, the trust achieved a 17.4% net asset value (NAV) return — a notable improvement on previous years. This is attributed to a strategic portfolio shift towards structural growth opportunities in markets like India and Indonesia, and reduced exposure to China. The trust’s diversified approach across various sectors and countries positions it to capitalise on Asia’s evolving economic landscape.
Risks to consider
The trust’s impressive dividend policy is certainly reassuring, but there are still some areas of concern. For instance, its heavy focus on the Asia-Pacific region exposes it to geopolitical tensions, currency fluctuations and regulatory changes.
In the past, economic challenges in China have impacted performance and may well do so again. Additionally, the use of gearing amplifies both potential gains and losses, adding another layer of risk. At times, it can run at a high premium to NAV, which can affect the long-term value of the investment.
Calculating returns
Unfortunately, the fund’s price performance hasn’t been spectacular, which weighs on total returns. Over the past 10 years, the share price is down 25%. However, when adjusting for dividends, it’s returned around 42% to shareholders — equating to a rather weak annualised return of 3.57%.
After being in a steady decline since late 2017, the price is now near a 15-year low. That means it could be a great entry point if Asian markets recover in the coming years. However, if it continues the same performance over the next decade, it’s likely to return less than a simple FTSE 100 index tracker.
Whether or not an investor wants to consider it would be based on their expectations in that regard. Yes, it may pan out to be a good opportunity, but for now, I’m keeping my sights set on dividend stocks with higher overall returns.
