Like many investors, I appreciate the passive income streams I can earn from owning high-quality dividend shares. So, from time to time, I have a think about what the best stocks to buy for their income potential may be.
To that end, here is one UK stock I think income-focussed investors should consider.
Almost a double-digit dividend yield
The share in question is Henderson Far East income (LSE: HFEL).
At first glance, some of the attractions are apparent.
This investment trust manager says that it “looks to maximise the growing opportunities for high-income investing”, specifically in the Asia-Pacific market. It has a progressive dividend policy, meaning it aims to grow the dividend per share annually – as it has been doing over recent years.
It pays dividends quarterly. That can be helpful in terms of providing regular passive income flows.
I like the fact that these are paid like clockwork, although of course no share’s dividend is ever guaranteed to last.
Until recently, Henderson Far East Income had a double-digit percentage yield. But with the share price having put on 27% since April, the yield has fallen.
Still, at 9.8%, it remains firmly in the high-yield category!
Disappointing share price performance
But when looking for stocks to be, a juicy yield can be a red flag. Might that be the case here?
For starters, Henderson Far East Income sells at a premium to its net asset value. It might be more attractive if it sold at a discount, but on the other hand the mere fact of the premium can be interpreted positively as a sign of investor demand for the share.
While the share has done well since Aprll, the longer-term picture has not been appealing. Over five years, the share price has fallen 24%.
Partly that reflects economic uncertainty in some key Asian markets. But I think it also points to a concern some investors have as to how sustainable the dividend may be.
This is always a worthwhile question to explore when looking at investment trusts with income as an objective. Are they earning big dividends from their own portfolio, or are they using share sales or other means to help prop up the dividend, thus eating into the capital or increasing the total dividend cost?
The second approach can work sometimes but often has a long-term cost as payouts can grow harder to maintain, let alone increase.
Can this dividend level be maintained?
Last year, Henderson Far East Income spent £43m paying equity dividends.
That is a smidgen more than its £42m net cash inflow from operating activities. The trust did not provide a breakdown of what came from dividends received versus proceeds from selling shares it owned.
Still, either way, that meant dividend payments swallowed the entire net operating cash flow. The trust can and does raise funds from non-operating activities, such as bank loans and selling shares.
So, the dividend could keep growing annually in line with the target. But I see a risk that it will not, given how much the dividend costs relative to operating cash flows.
But Henderson Far East Income does have a well-diversified portfolio giving it exposure to a region with ongoing strong growth opportunities. I see it as a share for income investors to consider.
