The current average dividend yield of the FTSE 205 is 3.31%. An investor who bought a tracker fund could expect to get this income payout. However, there are dividend stocks within the index that have a much higher yield. With active investing, good value can be found with generous yields. Here are two that I’ve spotted.
Elevated risk but high returns
The first is the TwentyFour Income Fund (LSE:TFIF). The investment trust specialises in buying higher-yielding, asset-backed securities. These include things like mortgages and collateralised loan obligations. Given that most of these securities pay out interest, the fund can generate strong cash flow, which it then pays to shareholders in the form of dividends.
The stock’s up 8% over the last year, with a dividend yield of 9.87%. One of the reasons why the yield’s so high is due to the nature of the assets being bought and sold. These loans and other debt products can be pretty risky. Therefore, the interest rate charged on them is much higher than normal. As a result, the overall yield that the portfolio produces is also high.
Of course, this can be seen by some investors as a key risk in the future. Even though the company owns a wide range of assets to diversify the concerns around defaulting, it’s still not perfect. Some of the securities used, such as credit default swaps, are very complicated financial instruments that can go badly wrong.
Even with this risk, the yield’s exceptionally high. Importantly, the fund has consistently grown its dividends, and revenue reserves are positive. This supports continued dividend payments from now on, due to the strong track record.
Predictable cash flows
A second option is SDCL Efficiency Income Trust (LSE:SEIT). Like TwentyFour, it’s an investment trust. In this case, it focuses on projects designed to reduce energy consumption and carbon emissions, while generating predictable, inflation-linked cash flows.
Over the past year, the stock’s down 8%, with a dividend yield of 10.95%. Part of the bump higher in the yield can be attributed to the share price fall over this period. Some of this move can be attributed to a general hit to sentiment for renewable infrastructure trusts. Also, concerns about interest rates staying higher for longer have negatively impacted the stock. After all, SDCL partly finances these large projects with debt. If interest rates do remain elevated, the costs of servicing the debt’s expensive.
Even with these risks, I think the stock’s a sustainable dividend payer. The predictable cash flows from secure, multi-year agreements mean steady revenue streams. In time, this filters down to consistent income payments. Also, many of the contracts are indexed to inflation, meaning that they can support real dividend growth. Further, it has solid clients, who are often investment-grade companies or public bodies, lowering default risk.
When I put all of this together, I don’t see the dividend as being under immediate threat. Both companies have a high yield and can be considered by investors for inclusion in a portfollio.
