High-yielding stocks can be very attractive to income investors. However, dividend shares need to be treated carefully, as a high yield can sometimes be unsustainable. So when I spotted a stock offering 10.41%, I did some more research to see if it was the best in the index or something to avoid.
No alarm bells on stock volatility
I’m talking about Ashmore Group (LSE:ASHM). For those unfamiliar, it’s an asset manager specialising in emerging markets. This means it invests (and manages investments) in emerging market stocks and bonds. In terms of revenue, it charges management fees based on the assets being held. So the more money it can attract, the better its financial performance should be.
Over the past year, the stock is down a modest 5%. Even though some might not be overly impressed, I am actually pretty happy about this. One common reason for a stock’s dividend yield to rise above 10% is a sharp price fall. It artificially pushes up the yield, only for it to fall again if the business is in trouble and has to cut the dividend. For Ashmore, a 5% decline isn’t terrible, so it doesn’t appear this is distorting the yield.
One of the main factors in the share price move has been the H1 results, which detail a net outflow of client assets. This meant that adjusted net revenue was £146.5m, 22% lower than the same period last year. Although this isn’t great, emerging markets did perform well, so I don’t see this as a long-term issue.
Looking ahead
Interestingly, CEO Mark Coombs commented: “Ashmore is therefore well-positioned to capture flows as investors shift allocations away from the US, including to the emerging markets that offer superior growth and higher risk-adjusted returns over the medium term.”
I think investors will look to bank some profit from US stocks in the coming months after an incredible run. They’ll then look to allocate the money elsewhere, and emerging markets via Ashmore will be an option. That could mean strong inflows in 2026, helping to support the dividend.
On the dividends specifically, it has paid out 16.9p consistently for several years. However, the dividend cover is only 0.42. This means the dividend per share currently accounts for more than twice the current earnings per share. This is a red flag and does concern me. Sure, if the company does well next year then earnings should rise, but if not, then this current payout could be unsustainable.
The bottom line
On the one hand, the steady share price makes the company attractive for dividend investors. Yet the low dividend cover is a worry for me. Therefore, I don’t think this is the best income stock in the FTSE 250. At the same time, that doesn’t mean it’s not worth considering. But it needs to be treated as a higher-risk option by investors.
