Often, high yields are unsustainable and end up leading investors into a dreaded ‘dividend trap’. Soon after purchase, the company slashes dividends and the investor’s left with a bag of worthless shares.

So when I see companies with yields of 8% or more, I first take a closer look. And it pays off because, on a few rare occasions, I find some that are actually worth considering. Here are two of them.

The up-and-coming REIT

NewRiver REIT (LSE:NRR) is a small (£307m) UK real estate investment trust that focuses on retail and community assets. Earnings are up 54% year-on-year, yet the shares still look cheap, trading on a forward price-to-earnings (P/E) ratio of just 8.9.

That suggests the market’s sceptical about the outlook for smaller property players, but the fundamentals are moving in the right direction.

For income seekers, its financial metrics are impressive: a meaty 9.2% dividend yield with a payout ratio of 97.2%. For most companies that would look dangerously high, but REITs are designed to distribute the bulk of their profits, so this isn’t unusual.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Crucially, NewRiver’s paid dividends uninterrupted for 15 years and currently has enough cash to cover the payouts, which adds comfort.

The risk? The balance sheet’s a little stretched, with total debt exceeding equity. That doesn’t make it uninvestable, but it does mean investors should watch borrowing levels and refinancing costs carefully. If earnings continue to rise, a fresh injection of equity or asset sales could help de‑risk the capital structure.

Until then, this is a high‑yield stock to consider that could reward well for accepting some leverage and sector risk.

Income in the heart of the capital

City of London Investment Group (LSE: CLIG) is a global asset manager specialising in closed‑end funds. It offers an 8.55% yield, with a payout ratio of about 106.6%. On the face of it, that’s a bit stretched, but the company has a 12‑year uninterrupted dividend record and about 1.2 times cash coverage, which helps soften the concern.

Earnings are heading the right way, up 11.6% year-on-year, and the shares look sensibly priced, with a P/E growth (PEG) ratio around 1. That suggests the valuation roughly matches its growth prospects, rather than relying on heroic assumptions.

The balance sheet is another plus: a very low debt‑to‑equity ratio of 0.03 drastically reduces the risk of a debt‑driven dividend cut.

The main risk here is that performance is tied to global markets and investor sentiment. A sharp downturn would impact the company’s assets under management (AUM), hurting fee income and the share price in one go.

For that reason, it’s best considered as part of a diversified income basket rather than a lone selection.

A risk/reward balance

While both these stocks have lower dividend coverage than I’d usually consider sufficient, their track records and balance sheets add comfort.

Still, when talking about yields above 8%, there’s always a higher risk of cuts. Both could certainly give a nice boost to an income portfolio’s average yield, keeping in mind the importance of diversification.

The post Looking for income stocks to buy? Consider these 8%+ yielders! appeared first on The Motley Fool UK.

Small-caps don’t always come with the stability of the big names, but they can offer fatter payouts and the chance to uncover hidden gems. Of course, liquidity’s lower, so selling a position at the desired price isn’t always straightforward. That said, every so often, I spot smaller UK shares that combine generous dividends with reasonably strong financials. 

Here are two I think income-focused investors should weigh up. Both strike me as overlooked dividend plays that could sit neatly in a diversified income portfolio.

Central Asia Metals

Central Asia Metals (LSE: CAML) is a copper producer with operations in Kazakhstan and North Macedonia. It’s not the kind of stock that usually dominates headlines, but the dividend yield is an eye-popping 12.7%. For investors chasing a second income, that’s going to grab attention. The  £247m company has also built a strong track record, paying dividends for 13 consecutive years.

Financially, it looks decent too. The dividend payout ratio stands at 83.8%, which is high but still within reason for a miner. On profitability, the net margin sits at 17%, and the balance sheet is almost debt-free – a rare strength in the sector. With a price-to-earnings (P/E) ratio of just 9.57, it even looks undervalued compared with peers.

But some risks can’t be ignored. Mining in emerging regions brings political and currency-related uncertainties. Any disruption in Kazakhstan or North Macedonia could directly hit production. The share price has also slipped 6.7% over the past five years, and investor confidence recently took a knock when Berenberg trimmed its price target from 180p to 170p.

Despite those challenges, I think Central Asia Metals is still worth considering for income hunters. The yield is hard to overlook, and the clean balance sheet gives it room to manage bumps along the road.

City of London Investment Group

City of London Investment Group (LSE: CLIG) shouldn’t be confused with the better-known City of London Investment Trust. This is the holding company behind the business, focused on running asset management operations.

It has a slightly lower yet still-healthy dividend yield of 8.52%, with an 11-year track record of continuous payments. Balance sheet strength looks reassuring, with low debt and an operating cash flow of £18.42m. Margins are also robust, which supports the sustainability of those payouts.

On the flip side, the dividend payout ratio sits at 113.4%, which is stretched. That’s the sort of number that makes me pause because it suggests future payouts could come under pressure if profits dip. The price-to-book (P/B) ratio of 1.58 also hints that the shares may be slightly overvalued compared with other asset managers. And unlike some small-caps, the growth potential looks limited, with the share price not expected to climb much.

Even so, with a yield comfortably above the FTSE 100 average and a solid financial footing, I think the £187m company’s another one worth checking out for anyone building a second income portfolio.

The post 3 overlooked small-caps paying juicy dividends for a second income appeared first on The Motley Fool UK.

Our monthly Best Buys Now are designed to highlight our team’s three favourite, most timely Buys from our growing list of small-cap recommendations, to help Fools build out their stock portfolios.

Why we like it: “Historically, dividends have made up an important part of the market’s total return, and perhaps for this reason investing for income is popular with UK investors. City of London Investment Group (LSE: CLIG), is a chunky yielder with a long-term record of growing income well ahead of inflation. Although dividend growth at the company has tailed off in recent years, and is largely dependent on the fund manager attracting new client money, we’re optimistic about the company’s attempts to win new business.

“Fund managers generate revenue by attracting investors into their funds and receive fees as a percentage of clients’ assets. One of the attractions of fund managers is that they have significant operational leverage – revenues typically grow at a rate that’s proportional to funds under management, and if costs stay the same, profits should grow at a faster rate. The company is cutting costs and, if a recovery kicks in and sales increase after costs have been reduced, then there’s a chance CLIG might enjoy strong profit growth.”

Why we like it now: Last month, City of London released its first quarter trading update, revealing net inflows of US$224 million across the Group’s strategies. This was driven by strong performance in International Equity strategies at CLIM and Municipal Bond strategies at KIM. These positive results may indicate the company’s resurgence after a challenging period in capital markets. Additionally, as previously announced, cost savings of approximately US$2.5 million per annum are expected to be fully realised in the next financial year. Currently, CLIG is trading with a 9.5% dividend yield. With sales activity showing signs of gaining momentum, the current price appears to offer a bargain.

The post Just released: our 3 top small-cap stocks to consider buying before June [PREMIUM PICKS] appeared first on The Motley Fool UK.

Long streak of dividend increases

The stock in question is the City of London Investment Trust (LSE: CLIG).

The attraction to me of such a pooled investment is that it offers exposure to a diversified range of companies. City of London, for example, owns dozens of shares including blue-chip names like Shell, BAE Systems and Unilever.

So although it is a FTSE 250 share, owning it would also offer me exposure to a host of FTSE 100 businesses without needing to buy them directly for my portfolio.

Over time, the trust aims to grow both income and capital value. In the past five years, however, the share price has fallen 23%.

On the dividend front, things are more promising.

The board says that it “fully recognises the importance of dividend income to shareholders”. The trust has raised its payout annually for 57 years. That makes this share one of the longest-performing Dividend Aristocrats on the London market.

Future prospects look mixed

However, past performance is not a guide to what will happen in future.

On one hand, I think the trust’s mixture of leading and mid-sized UK-listed companies could help me benefit from what I see as attractive valuations in the UK market.

On the other hand, the economy continues to look weak. Just because shares are cheap does not mean that they cannot get cheaper still.

I see a risk that, if the FTSE 100 performs poorly in the coming years, that could hurt the City of London Investment Trust share price.

Although the managers at the trust are paid to choose individual shares they think have good prospects, that does not necessarily mean that they will outperform the wider market. The past five-year record illustrates that all too clearly.

I’d consider buying this November

Nonetheless, I like the idea of owning this stock in my portfolio. While a long history does not necessarily indicate what will happen in future, the trust has had a stellar dividend run. Its management team has deep experience in the UK stock market.

Over the long term I think it could offer me exposure to a UK stock market I think looks attractively valued. The yield is also appealing to me.

Although dividends are never guaranteed, I expect the trust managers to work hard to continue the decades-long pattern of annual increases. That is a key focus for many of the trust’s shareholders.

If I had spare cash to invest this November, I would consider buying some City of London Investment Trust shares for my ISA or SIPP.

The post One 5%+ yielding FTSE 250 investment trust I’d consider buying this November appeared first on The Motley Fool UK.

Today I’m looking at three UK small-cap shares with forecast dividend yields over 8%. I think they’re all attractive investments with solid future prospects.

Buy the dip

My first choice is property developer Watkin Jones (LSE: WJG). This £270m business specialises in building purpose-built student property and build-to-rent apartments.

Unlike a typical housebuilder, this business doesn’t generally hold unsold property on its books. Instead, new projects are generally forward sold to buyers before they’re completed. This model reduces the financing risk taken by Watkin Jones and supports attractive profit margins.

Management say that the firm started its new financial year (on 1 October) with £270m of revenue already secured. That’s around six- or seven-months’ trading.

However, the firm’s profit margins are coming under pressure due to higher interest rates. What’s happened is that Watkin Jones’ buyers are facing higher borrowing costs. As a result, they’re pushing for slightly lower purchase prices.

Property market conditions could still get worse. But Watkin Jones’ share price has fallen by 50% since August and the firm has plenty of cash. The dividend looks safe to me, providing a forecast yield of 8.5% for 2022/23.

A household name

My next stock is more of a household name. Tile retailer Topps Tiles (LSE: TPT) recently reported record sales for the second year running. Adjusted pre-tax profit for the year ended 1 October climbed 4% to £15.6m, despite rising costs.

Topps’ share of the UK tile market rose to 19% last year. Average sales at each store are 25% higher than they were in 2019. Nearly two-thirds of sales are now made to trade customers.

This business looks in good shape to me. The main risk I can see is that in a prolonged recession, demand for home improvement would be likely to fall. That would probably hit sales.

Fortunately, there’s no sign of this yet. The company says that like-for-like sales rose by 3.4% between 2 October and 28 November, compared to the same period last year. City analysts expect a dividend of 3.6p per share for the year ending October 2023, giving Topps Tiles a forecast yield of 8.9%.

A niche investor

City of London Investment Group (LSE: CLIG) is a specialist asset manager that serves wealthy individuals in the US and institutional clients in the UK.

CLIG specialises in investment trusts and fixed income (bonds), with a focus on value strategies.

This business is highly profitable and consistently generates plenty of surplus cash each year. The main risk for investors is that it’s been very slow growing. CLIG’s share price of 418p at the time of writing is roughly the same as it was five years ago.

Despite this, shareholders have done well, thanks to generous and reliable dividends. I calculate that dividends received over the last five years would have provided a return of nearly 40% — all in cash.

At current levels, City of London shares offer a forecast yield of 8.3% for 2022/23. I think that looks safe and rate these shares as a good buy for income.

The post 3 ‘hidden’ high-yield stocks to buy in December appeared first on The Motley Fool UK.

Tritax

Even if consumer spending slows, I expect demand for warehousing to be fairly buoyant. That could be good news for warehouse specialist Tritax Big Box REIT (LSE: BBOX).

The shares have lost 36% of their value over the past year, meaning they now offer a dividend yield of 5.1%. A recession could lead to customers cutting budgets, which might be bad for Tritax. But the business seems to be in good health. In the first half, the contracted annual rent roll rose by 11% and the interim dividend grew 5%.

Tritax has a strong position in a sector I expect to see long-term structural growth. I would buy it for my portfolio today and hold it for the long term.

Games Workshop

One of the economic consequences of a recession can be that people spend less time and money on entertainment away from home, preferring the cheaper option of a night in.

That could be good news for Games Workshop (LSE: GAW). This FTSE 250 business makes money from roleplay games, both physically and online.

I think Games Workshop has a strong competitive advantage that could help it do well. It owns the Warhammer franchise, giving it pricing power and the benefit of a sizeable installed customer base.

I do see risks, such as the company’s concentration of manufacturing. If its main factory has a problem, that could hurt sales and profits.

But with its competitive advantage, 4.5% yield, and the prospect of robust demand, I would buy Games Workshop shares for my portfolio today and hold them during the recession.

City of London Investment Trust

Another of the FTSE 250 shares I would consider adding to my portfolio in a recession is the City of London Investment Trust (LSE: CTY).

Does it seem like a long time since England won the football World Cup? The year that happened (1966) saw the start of a run of annual dividend increases by the investment trust that remains unbroken.

At the moment, City of London has a dividend yield of 5.3%. Past performance is no guarantee of what will happen in future. But I like the trust’s focus on generating income for shareholders by investing mostly in UK companies, particularly large multinationals.

I think that makes sense, especially in a recession when large companies often have stronger experience and resources to ride out the storm than small ones. There is a currency risk to earnings due to a weaker pound hurting the sales prospects of many British exporters. That could reduce the value of some of the trust’s investments.

But I would tuck these shares in my portfolio and hold them through a recession and beyond.

The post 3 top FTSE 250 shares I’d buy in a recession appeared first on The Motley Fool UK.

For me, my dream was to retire early and spend time doing what I love, not just what pays the bills. And it was only through creating enough passive income that I was able to do so.

But, it can be tricky to find the right investments for my portfolio. These are two of my favourites that both play their part in letting me live my life how I choose to.

A growing dividend stable earner

City of London Investment Group (LSE: CLIG) have long been one of my favourite shares that I hold. I first bought this back in 2013 and every year since it’s paid out a chunky dividend. In fact, it’s grown by 9% on average since it started paying a dividend in 2007.

At the moment, it’s still trading down about 15% year to date, giving a historic-based dividend yield of around 7.8%.

If I didn’t already own plenty of these shares in my portfolio, I’d be happy to top up again.

A passive income diversified ETF

Next up, one of my favourite footsie-based ETFs, the not-so-catchily named iShares UK Dividend UCITS ETF (LSE: IUKD).

When I’m looking to live off my passive income portfolio, stability is good. And one way for me to achieve that is through this ETF. That’s because it invests in the top 50 individual high-yielding shares in the FTSE 350 after some basic screening.

If one company runs into issues and decides to cut their dividend, the average dividend yield will fall slightly. That’s much more manageable for me in terms of cash-flow than suddenly receiving nothing.

True, it comes with a slight cost for that benefit, but at 0.4% I think it’s reasonable for what I get.

Currently, it’s returning a potential dividend of around 6%, which I consider pretty good for something with those diversification upsides.

Again, it’s another I’d be happy to add to if I didn’t already own enough for my portfolio.

Playing the long game

At this point, you may be wondering if I’ve simply cherry-picked the passive income investments that have worked out best for me to make this article sound good.

The truth is, no, I own others that worked out better. And there are also those that turned out worse. The honest answer is that not all shares will work out — and that’s okay.

Because that’s why owning a diversified portfolio and holding onto it over the long term was the number one most important thing I did.

It was fundamental for growing my wealth in the first place. And then for turning that wealth into a passive income portfolio I now live off.

After all, I’m all about putting your money where your mouth is. And these tips helped me do exactly that.

The post WARNING! These passive income ideas seriously changed my life! appeared first on The Motley Fool UK.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

High yields, growing profits

First, City of London Investment Group (LSE:CLIG) has seen its share price fall 18.8% in the past year. It’s down 10.5% in the last three months. At the time of writing, the shares are trading at 420p.

Currently, the company has a dividend yield of 7.6%. Last year the global asset management firm paid a dividend of 33p per share. 

Using half of my allowance I could buy 2,380 shares. Multiply this by the dividend payment and I could be looking at a potential annual income of £785. 

It’s important to note, however, that dividend policies can be subject to change at some future date.

And funds under management fell to £7.6bn for the year ended June 2022. The year before, this figure stood at £8.3bn. This decline has been caused in a large part by rising interest rates and inflation.

Nevertheless, the business reported that net profit rose to £18.1m from £17m over the same period.  

Speedy earnings growth

Second, shares in Halfords (LSE:HFD) have fallen 52% in the last year and they’re up 17% in the past month. Currently, they’re trading at 170p.

For the year ended April, the motoring and cycling retailer paid a dividend of 9p. This equates to a dividend yield of 5.2%.

With my remaining £10,000, I could buy around 5,848 shares. Multiplied by the dividend per share, this results in an annual payment of £526.

Between 2018 and 2022, earnings per share (EPS) grew from 29.6p to 35.5p. By my calculations, this results in a compound annual EPS growth rate of 3.7%. While this isn’t particularly exciting, it’s consistent. 

It’s worth noting, however, that this growth is not guaranteed in the future.

There’s also the risk that the customer base continues to decline in the midst of the cost-of-living crisis. There’s a possibility that this could negatively impact future balance sheets.

On the other hand, revenue was up 6% year-on-year, to £1.37bn. This was largely due to the sale of products related to electric vehicles and e-scooters.  

Overall, my calculations suggest that I could get £1,311 per year in dividend payments by investing in these two companies. This is the equivalent of just over £100 per month. I find this attractive, and I’ll deploy this plan during the next tax year, when my £20,000 allowance resets.

The post How I’d invest £20,000 in a Stocks and Shares ISA to target £100 in monthly income appeared first on The Motley Fool UK.

It’s not like a Rio Tinto or Royal Mail, where it’s easier to understand what they do. But it is a long-standing favourite of mine, so let’s introduce it properly.

What does it actually do?

Known for convenience as CLIG, you might first think it’s just like any other fund manager. But there’s one key difference here, in that it specialises in closed-end funds.

Originally focused on emerging markets, it has since widened that scope geographically. That’s alongside including other specialist investment types, like REITs (real estate investment trusts).

Why do I highly rate this passive income payer?

Why I like this particular investment comes down to three main reasons:

Consistency: CLIG first started paying a dividend in 2007 and has never missed a year since, not even through the 2008 financial and 2020 pandemic respective crashes.

I find that very reassuring, and it tells me that management are committed to returning value to its investors.

Growth: Consistently growing a dividend is another trademark of a great passive income investment. CLIG, from its starting dividend of 10p, has grown, on average, around 9% per year.

While it wasn’t always a smooth rise, that’s an overall dividend growth rate I’m very happy with.

Diversification: Spreading your risk is important in any investment portfolio and by investing in CLIG, I can indirectly gain exposure to closed-end funds and REITs globally. As I’m low on those in my own portfolio, this means I’m unlikely to duplicate existing holdings.

Those are all great reasons, but, as ever, there are risks to consider, so let’s get into those now.

What are the concerns with City of London Investment Group?

I see two key risks to assess with this particular investment:

Dividend Cover: CLIG can be seen to have a low dividend cover rate over time. While it usually keeps to around 1.5, it did fall to a mere 1.01 in 2020. Since then, it’s recovered back to 1.19, with management forecasting a return to the 1.5 level.

Changes at the top: Barry Olliff, founder of City of London Investment Group, is due to retire from his directorship on 31 July. With several other board changes at the same time, there’s a risk of a change of direction or lack of focus on delivery.

Do I think City of London Investment Group is a good buy now?

I first bought CLIG back in 2013, at the now bargain-seeming price of £2.58p. Since then, alongside that consistent passive income stream, it’s risen to well over £5 at times.

Recently, like many shares, it’s fallen from those highs – down about 15% this year, to around £4.20p. At that price it’s now offering a healthy 7.5% dividend yield.

And while market-timing is not a game I play, I have taken the opportunity to add to that original purchase.

Because as a long-term Foolish investor, I want exactly the kind of passive income investment it offers. And I see no reason for that not to continue for several years yet.

The post Why is City of London Investment Group such a great passive income payer? appeared first on The Motley Fool UK.

After all, I grew up in an environment where stock markets were considered dangerous, risky. They were something that only rich people played with.

But now, after almost 10 years of investing, that first stock– and others like it — turned out to be a key step to retiring early in my forties.

How did I start investing in shares?

I’ll be honest, I only started thinking about buying shares when other options, like savings accounts, started cutting interest rates. The further they fell, the more I knew I would have to do something different if I wanted to continue to grow my wealth.

So, I got curious. I started learning about how stock markets worked. Sites like The Motley Fool and the like are full of useful information, and I devoured them.

I was reassured by the long-term performance of stock markets, which was vastly different to the off-putting screaming ‘buy/sell now’ over-hyped headlines.

For example, if you look at the FTSE 100 over all the different 10-year periods it has been trading, you will get a range of annual returns from -8.7% to +19%. But no individual 10-year period has ever lost an investor money.

That was hugely comforting. Plus, the average 10-year return was around a healthy 8.9%. It was time to take the plunge and buy my first ever stock.

What was my first ever passive income share?

It might surprise you to learn that my first ever passive income share was the perhaps lesser known company called City Of London Investment Group (LSE:CLIG).

Why this company? I liked its track record of dividend payments, and it had a clear strategy for the future that made sense to me.

It was also out of favour in the markets, far down from its 52-week high of ~£4. I ended up buying 558 shares at £2.49, giving a dividend yield near 10%.

In fact, if I add up all the passive income I’ve received through dividend payments, it’s more than I paid for the original investment! And that’s ignoring the fact I could still sell those shares today for a healthy profit.

Those numbers might not look much to some, but I’ve since added to this and other holdings over the years. And then that’s when the real ‘magic’ happens. Slowly and steadily, you end up owning a substantial, diversified, passive income portfolio.

The truth of risk and reward

Now, I’m not sharing this to boast about my investment success. That’s not my style and they don’t all work out so well. I’ve had my failures, too, for sure.

But the real point here is, yes, stock markets are risky. It’s one of the hard truths of investing – reward needs risk.

But by investing over the long term, those risks are far more in my favour, so long as I diversify my portfolio and choose wisely.  

And that’s why I’ll continue to invest in good companies for the long term – after all, it’s the Foolish way!

The post How passive income helped me retire (really!) early appeared first on The Motley Fool UK.