Taking advantage of higher yields

To understand why a market correction can help dividend investors, let’s consider an oversimplified view of its impact on a portfolio. Let’s say a portfolio currently has an average dividend yield of 6%. The market then falls by 10%. If the investor then went and bought all their stocks again, the average yield could be 6.6%. This assumes that all the stocks in the portfolio have fallen the same amount as the index, and that the dividend per share hasn’t changed in the past month.

Of course, this doesn’t work out perfectly in reality, but the principles are correct. So if someone was looking to get started in building a passive income, the move in the market could provide an attractive entry point. This is because the average dividend yield will have increased in recent weeks.

To build this into a £10k annual cash flow, patience would be needed. If someone was able to buy a diversified group of stocks with an average yield of 6.6% with £600 a month, the portfolio could quickly grow. By reinvesting the proceeds whenever a dividend was paid, the compounding impact would further speed up the process. By year 14, the pot would be generating over £10k in annual passive income.

There are risks involved. Even though I think a portfolio with this average yield is realistic, it’s higher risk than buying stocks around the index average yield of 3.17%. Furthermore, companies can reduce or increase the dividend each year, making it hard to forecast far in the future.

A strong track record

One company that could be considered for inclusion in the portfolio is the International Public Partnerships (LSE:INPP). The stock is up 18% in the past year, with a current dividend yield of 6.62%.

It isn’t a typical company in the sense of selling products or services. Instead, it’s an investment trust that owns stakes in essential infrastructure assets (things like schools and hospitals) across the UK, Europe, and beyond. These assets are usually backed by long-term government or public-sector contracts. This means they generate predictable, inflation-linked cash flows over the long term.

The nature of the business, therefore, makes it appealing for income investors. Beyond that, the track record speaks for itself. The company has increased its dividend for 18 consecutive years! Past performance doesn’t guartentee future returns. But it does give a very good indication that the dividend could keep increasing in the future.

It’s true that there’s political and regulatory risk, given many of the assets depend on government contracts. This needs to be managed carefully to avoid an over-reliance on one client.

Overall, I think it’s a stock to consider that could form part of a diversified portfolio that can be started with the recent market correction.

The post How to turn a stock market correction into a £10k passive income appeared first on The Motley Fool UK.

Benefits of building a portfolio

The strategy’s based on owning a broad enough set of stocks that pay out regular dividends, so that each month, money is coming in. For the first few years, the income would be reinvested. This helps speed up reaching the goal of hitting £10k a year in passive income.

The broad portfolio also reduces risk. If the investor owned only one stock and it ran into difficulties down the line, all of the dividend potential could be at risk. Yet if a dozen or more companies are owned, even if one cuts the dividend, the overall yield isn’t massively damaged.

The target yield of the portfolio is essential, as it dictates how long it takes to reach the end goal. Everyone’s risk tolerance is different. Low-risk investors might want to focus on options around the FTSE 100 and FTSE 250 averages in the low 3% range. High-risk investors might push for a dividend yield of 10%. I think it’s reasonable to assume a target yield of 6%.

Talking numbers

In theory, let’s say someone invested £500 a month with this target yield. The portfolio would need to be worth £166.7k. This could be hit during year 14, meaning the investor might not have to invest anymore beyond this point and be able to save the £10k annually.

It’s plausible to do this, but I do have to caveat things by explaining that planning this far in the future isn’t perfect. There are so many factors that could change the goalposts over the next decade, potentially making this take longer than planned.

Shaking hands with the government

One example of a company that could be considered for this project is the International Public Partnerships (LSE:INPP). As the name suggests, it’s an infrastructure investment trust that focuses on public, government-backed projects.

Over the past year, the stock’s up by 4%, with a current dividend yield of 6.83%. This makes it a good fit for the style of income stock for the portfolio.

To be clear, the business doesn’t build infrastructure. Rather, it owns equity stakes in existing operational assets. Governments or public bodies make regular payments, which I think makes the dividend fairly stable. After all, these types of clients are unlikely to go bust!

I’d say the dividend’s sustainable because a lot of the contracts tied to the assets are long-term (we’re talking decades). Therefore, the income payments are typically fully covered by operating cash flow. As a result, the management team isn’t reliant on asset sales to pay income. The current dvidiend cover is 1.5x, so I don’t see any stress here.

In terms of risks, it’s exposed to any changes in political policy. If the government decides to cut budget spending or looks to shift to another provider, it could be painful financially. Yet even with this, I think it’s a stock for investors to consider.

The post How much do you need in income stocks to save £10k a year from dividends appeared first on The Motley Fool UK.

Building the future

One option to consider is International Public Partnership (LSE:INPP). The company invests in a large diversified portfolio of infrastructure assets and businesses. These are often under public-private partnership structures or similar long-term contracts like building schools.

Over the past year, the share price is down a modest 5%, with the dividend yield at 6.94%. One reason why I believe the dividend is sustainable is due to the nature of the contracts. They often span several years, with deals linked to inflation, which protects the cash flows and makes it predictable. As a result, the company can look to budget around revenues with some visibility. Although this doesn’t mean it’ll never post a loss, it does provide confidence that management can generate cash in future years sufficient to cover dividend commitments.

It also has a clear dividend policy, so investors know what they are getting themselves into. For example, International Public Partnership says that it expects full dividend cash coverage from net operating cash flow before capital activity. This is quite important as it means the company expects that its operating cash generation (before considering things like buying or selling assets) is sufficient to cover the dividend.

One risk is the concentration of projects with the government. Even with long-term contracts, if the administration decides to cut back spending on certain areas, it will eventually have a negative impact on the company’s revenue overall.

Buying a potential dip

Another idea is Greencoat UK Wind (LSE:UKW). It’s a UK-listed renewable infrastructure investment trust focused exclusively on UK wind farms. Over the past year, the stock is down 22%, with a current dividend yield of 9.66%.

Let’s first address the share price fall over this time period. Part of this reflects a drop in the net asset value (NAV). The stock does follow the movements in the value of the portfolio, which is its wind farms. Therefore, lower valuations have dragged the share price down with it.

Another factor has been that wholesale electricity prices have come down compared to the highs. That directly affects revenue from electricity sales, especially for parts of the portfolio not in fixed contracts. I’m not too concerned here for the long term, as commodity prices are volatile and therefore could bounce back just as quickly as they fell.

Despite these problems, the dividend per share has been increasing over the past few years. It aims to align the dividend increase with inflation, which is a positive. In the latest H1 2025 results, the dividend cover was 1.4. Anything above one shows that the current earnings per share can completely cover the dividend. Therefore, I don’t see any immediate worry with any potential cuts.

Even though the above stocks are higher risk than normal, the large dividend yield could make them attractive enough for an investor to consider.

The post 2 FTSE 250 dividend shares with double the current index yield appeared first on The Motley Fool UK.

Public sector cash flow

The first one is International Public Partnerships (LSE:INPP). The UK-listed infrastructure investment company focuses on acquiring and managing a portfolio of assets. This mainly revolves around public-private partnership projects, such as renewable energy initaitives.

The reason why investors might like this as a company is because the assets are typically backed by long-term, government-supported contracts. This means that the revenue generated by the company can be seen as stable and predictable. It therefore translates to good cash flow, which in turn allows the dividend to be paid.

For the past decade, the dividend has been ticking higher each year, being paid semi-annually. It has a policy of increasing it by 2.5% each year. At the moment the yield is 7.22%. Assuming that the 2.5% increase keeps occurring and we don’t see any crazy share price movements, the yield should remain above this level.

The share price is down by 11% over the last year. One reason for this is the “volatile macroeconomic environment” that was spoken about in the interim financial report. With inflation starting to rise again and uncertainty about interest rate movements, this is a risk going forward.

The future of energy

Another income stock is the Foresight Solar Fund (LSE:FSFL). I wrote about the company earlier in the month, flagging up the potential for a bumper yield going forward.

At the moment the dividend yield is 10.84%. Usually investors get paid a dividend each quarter, with the amount increasing once a year. According to analyst expectations, the upcoming June declared dividend could rise to 2.1p per share (from the current 2p level). In June 2026, this is expected to rise to 2.19p, with June 2027 at 2.27p.

The factor that fuels this increase is similar to International Public Partnerships. It makes money from owning and managing a portfolio of solar energy assets. It has power purchase agreements (PPA) with suppliers, which mean the revenue is quite certain based on the contracts. Further, being in the renewable energy sector should mean long-term success, given that this is seen by many as the future of fuelling the globe.

However, operating in the energy space does have risk. The 26% fall in the share price over the past year can partly be attributed to lower power prices. This has a direct negative impact on revenue.

Both shares could offer an investor income in the coming few years. Of course, this isn’t a guarantee, but is something to consider.

The post 2 dividend shares that could yield 7%+ between now and 2027 appeared first on The Motley Fool UK.

Details of the firm

The company I’m talking about is the International Public Partnership (LSE:INPP). Over the past year, the share price is down by 20%. The current dividend yield is 6.55%.

The firm aims to invest responsibly in social and public infrastructure that delivers long-term benefits for all. What this means in practice is that it has a portfolio spread around the world of commercial properties and infrastructure. This ranges from sectors such as health to transportation. It also includes some promising new areas within digital infrastructure.

Given the income it receives from the rent and leasing, it can afford to pay out dividends to shareholders. It typically pays two dividends a year. These have been growing year on year and should continue to do so. A key factor in this is that the business aims to link the dividend to inflation.

Recent performance

The share price has fallen below the net asset value (NAV) of the properties in the fund over the past year. At the moment, it trades at a 25% discount. Granted, the NAV value is only updated twice a year, so this discount needs to be taken with a pinch of salt.

Factors that have hindered the company relate to higher interest rates and an uncertain property market. Higher rates makes taking on new debt to fund new projects more expensive. This eats into profits.

The uncertain property market means that the valuations of commercial sites aren’t great right now.

Even though this is a risk going forward, the property market is cyclical. I think that’s why this stock hasn’t received a lot of media coverage or recommendations recently. This is because the sector isn’t in a great spot right now.

Yet I think that’s what makes it a gem. To buy now allows investors to enjoy the elevated yield. At the same time, in years to come I’d expect the share price to rally back to the NAV value. This could result in a profit for early investors.

Why quiet stocks are sometimes the best

I’ve found in the past that sometimes when a stock is all over the news for good reasons, the share price has already jumped. In other words, I’ve missed the boat.

That’s why finding stocks that are flying under the radar can be great for investors. Of course, the risk is that the company never gets the attention it deserves. But if others pick up on the value and income that I believe there is at the International Public Partnership, it could do very well in coming years. That’s why I think investors should consider buying the stock now.

The post Why is no one shouting about this FTSE 250 income gem? appeared first on The Motley Fool UK.

Currently focused on Europe, North America and Asia, 3i aims to extend its portfolio worldwide. At the halfway stage this year, the company said it’s on track to meet its targets. As of 27 September, there was a cash balance of £17m on the books, though 3i has drawn £192m of its revolving credit facility, with £108m undrawn.

Dividends from growth

Even though the strategy is to expand by acquisition, 3i already offers a progressive dividend. The 9.2p per share planned for the full year to 31 March is on track, with the firm’s portfolio generating good income — portfolio income and non-income cash came to £57m in the first half.

I am a little concerned with 3i’s expressed intent to deliver a sustainable total return of 8-10% per annum. It’s not that I don’t like that kind of profit, but I don’t like companies saying so up front.

In my experience, when a company fails to achieve a stated target one year (which almost always happens), growth investors tend to jump ship in great numbers and the share price can tank.

Still, we’re looking at a P/E of only around nine, and the progressive dividend is offering a modest but attractive yield of a little over 3%. With its long-term strategy, I reckon 3i is an attractive FTSE 250 ISA candidate.

Depressed sector

In International Public Partnerships (LSE: INPP), we’re looking at another closed-ended investment firm, this time targeting a chunk of its funds at public-private partnership projects covering Europe and North America.

IPP shares are on a higher valuation, with a P/E multiple of around 16. Dividends are higher too, though, with 2018 providing a 4.6% yield. And they’re also progressive

For the first half, the company told us its investments “continued to generate strong operational cash flows,” leading to a 2.2% rise in net asset value per share (NAV) and lending support to a 3.59p interim dividend. With NAV at 150.3p, the stock is trading at only a slight premium on a 154p share price as I write, and I really don’t see that as demanding.

Cracking returns

Since IPO, IPP has generated an average annualised rate of 8.2% in total shareholder returns, which is a very healthy record. Being towards the bottom of 3i’s targeted 8-10% range, I think it adds extra support for my thought that that company is perhaps being a little too ambitious.

On the expansion front, International Public Partnerships has just completed a new equity issue which raised £116.5m gross, expanded beyond initial intentions due to significant over-subscription. The cash will be used to pay down borrowings used for the company’s recent acquisitions, boosting its “strong position to pursue the pipeline of opportunities identified in the UK and overseas.“

IPP is is another FTSE 250 stock that’s just made it on to my ISA watch list.

The post 2 FTSE 250 growth plus dividend shares I’d put in my ISA today appeared first on The Motley Fool UK.

Equities have made up an increasing share of a retirement investors’ portfolio. But so have alternative asset classes, such as property, credit and infrastructure investments. Some of these offer attractive return and risk profiles, which is why I’m looking at two of such investments as potential sources of retirement income.

Infrastructure

First up is International Public Partnerships (LSE: INPP), which invest in long-duration public infrastructure projects. The investment trust has over 120 holdings across a variety of sectors, offering investors diversified exposure to the sector and limiting the impact of operational risks.

Infrastructure investments make attractive defensive income investments because they earn stable, long-term cash flows. These are derived from essential physical assets, such as health and education facilities, public transportation, water and waste projects, energy and urban infrastructure.

The income they earn also has a very limited correlation with traditional investments, such as stocks and bonds. This means the inclusion of such investments could offer investors greater downside protection against a broader market sell-off.

Strong track record

International Public Partnerships, in particular, has a strong track record of growing both its capital value and shareholder distributions. Since 2007, it has delivered average annual dividend growth of roughly 2.5%, giving it a forecast payout of 7.00p in 2018.

Total returns have been even more impressive, with total shareholder returns of 165% since its IPO in 2006. This exceeded the performance of the FTSE All-share Index by 68% percentage points, and represented growth of 9.2% on an annualised basis.

Shares in the investment trust currently trade at a 1% discount to its net asset value, and offer a prospective dividend yield of 4.9%.

Student property

Student property is another interesting asset class and, in this space, I’m taking a closer look at GCP Student Living (LSE: DIGS).

Unlike a lot of companies operating in the purpose-built student accommodation market, this investment company primarily invests in and around London. It focuses specifically on assets located in the capital because the investment managers believe investments there will particularly benefit from supply and demand imbalances. High land costs, combined with heavy competition for land, means supply in London will likely be far outstripped by demand growth, driven by rising student numbers.

This geographical focus does have its downsides as well, given falling property values in the capital and its greater reliance on international students. This puts it at a greater risk of tighter immigration rules that could reduce the number of student visa applications.

Nevertheless, the student accommodation sector is still an attractive asset class for defensive income investors, given the non-cyclical nature of demand for higher education and the chronic shortage of purpose-built student properties, which command a rental premium to residential properties. Yields from the sector are also higher, with GCP Student Living earning an average net initial yield of 5%.

Shares in the investment company currently trade at a 3% discount to its net asset value, and offer a prospective dividend yield of 4.1%.

The post In your 60s? These defensive dividend investment trusts offer 4%+ yields appeared first on The Motley Fool UK.

I believe the market has overreacted in the case of this trio of companies and that now could be a great opportunity to buy a slice of what I view as very attractive businesses for long-term investors.

Discount prices

The shares of HICL, INPP and JLIF are 20%, 12% and 19% below their 52-week highs and down 11%, 7% and 9% from the day before Carillion went into liquidation on 15 January. The table below shows net asset value (NAV) and dividend data for the three firms.

As you can see, HICL and JLIF are now trading at discounts to NAV and INPP at a small premium. All three companies offer generous dividend yields, based on their trailing 12-month payouts. All three have also issued updates since Carillion’s collapse. How do these bear on their valuations?

The Carillion factor

HICL: Carillion provided facilities management (FM) to 10 (14% by value) of the 116 projects HICL is invested in. It was not the contractor on any of HICL’s current construction projects, but there are five projects where Carillion was the original construction contractor and, at the time of the liquidation, held responsibility for latent defect risk. Based on current information, HICL estimates the adverse impact of the Carillion factor to be 2.8p of NAV per share (1.8%).

INPP: Carillion provided FM to 3% by value of the 127 projects INPP is invested in. It currently anticipates the adverse impact to be a negligible 0.01p of NAV per share.

JLIF: Carillion provided facilities management to nine (8.5% by value) of the 63 projects HICL is invested in. It was not the contractor on any of JLIF’s current construction projects but there is one project where Carillion was the original construction contractor and held responsibility for latent defect risk. Based on current information, JLIF estimates an adverse impact on NAV of £3m, which I calculate as 0.3p a share per share (1.8%).

Storm in a teacup?

All three companies had been aware of the issues affecting the construction and FM  giant for some time and had made contingency plans in the event of liquidation, which they’re now implementing. Principally, this concerns the appointment of replacement facilities managers.

HICL faces the biggest impact on its NAV (albeit not very big at all) and I’m encouraged by two factors to think we’re looking at something of a storm in a teacup. HICL has said: “The Board is confident that this analysis does not change the dividend guidance that the Company has published for the current financial year and the two subsequent financial years.” The other encouraging thing is that last Friday two directors and two senior managers bought shares totalling about £250,000.

With all three companies’ shares trading well down from their 52-week highs and sporting generous dividend yields, I believe now could be a good time to buy.

The post The fall of Carillion has created a buying opportunity in these 3 stocks appeared first on The Motley Fool UK.

Thankfully, Legal & General (LSE: LGEN) is here to help with its shares trading at just 10 times forward earnings, below their five year average, and a very handsome 5.7% dividend yield to keep income investors happy. And although this bargain basement valuation suggests low growth ahead, the company so far shows no signs of slowing the tremendous progress it’s made in growing earnings over recent years.

The key has been a diversified approach to benefitting from an ageing population in the developed world that is leading retirees and companies to engage Legal & General for pension solutions, insurance, investments and general savings. In H1 this year, double-digit profit growth from its two main divisions, retirement and investments, saw group operating profits leap 27% year-on-year (y/y) to £988m.

A large chunk of this growth was due to the release of £126m in reserves due to reductions in life expectancies for customers, but even excluding this possible one-off event, growth was very healthy. Looking ahead, there are still plenty of growth opportunities open to the company. Overseas operations are still small. But the US insurance business is profitable and growing quickly while international sales of its investment products are increasing by double-digits.

On top of this the company’s willingness to buy the bulk annuities business from rivals fleeing the sector could prove a solid use of capital for the long-term oriented insurer. With profits growing quickly, very healthy capital reserves, a bumper dividend and attractive valuation, I reckon income and value investors alike should take a look at Legal & General.

As safe as you can get

But if insurers aren’t your cup of tea, another high-yielding option trading at an attractive price is infrastructure investment fund International Public Partnerships (LSE: INPP). As its name suggests, the company invests in the debt of large infrastructure projects with a focus on schools, energy transmission networks and transport links.

These projects generally have some degree of government backing and provide reliable cash streams over many, many years that INPP either re-invests or returns to shareholders via a dividend that currently yields 4%. At today’s share price the fund trades at a 14% premium to its net asset value, but in a world of rock bottom interest rates this isn’t entirely unreasonable given the rather desultory options out there for investors seeking safe income options.  

The company’s latest large investment was £274m to purchase a 61% stake in National Grid’s UK gas transmission network alongside other investors, which helped push up the average life span of its investments to 36 years. This means management can use long-lived, highly predictable revenue to target an average 2.5% increase in dividend payments every year. INPP’s shares won’t rocket overnight, but since 2006 the fund has produced a compound annual total shareholder return of 9.5%, which isn’t too shabby at all given its low-risk nature.  

The post Legal & General Group plc isn’t the only mega-yielder trading at a bargain price appeared first on The Motley Fool UK.

The company is extremely good at what it does. Over the past four years, pre-tax profits have risen from £68.4m to £143.7m today. Over the previous five years, shares in it increased 31%.

Today the company reported its results for full-year 2016, which are rather upbeat. Net asset value for the group rose 24% from £1.3bn to £1.6bn at the end of 2016. Net asset value per share increased by 9.2 % from 130.2p to 142.2p. And pre-tax profit before finance costs increased from £84.5m in 2015 to £179.1m. During 2016, management invested £489m in 18 projects and it believes there are plenty of other opportunities for capital investment on the horizon. Specifically, in today’s results release, management noted there is a “clear pipeline of new opportunities offering attractive returns for 2017 and beyond.”

Slow and steady growth

IPP isn’t the next Boohoo.Com or Fevertree, nonetheless, the company looks to be one of London’s most attractive growth investments.

Although growth is relatively slow compared to the likes of Boohoo, it is based on steady balance sheet expansion, which is likely to be more sustainable in the long term. What’s more, IPP’s management is committed to steady dividend increases for the firm. At the time of writing the shares currently support a dividend yield of 4.2%, and management has announced its commitment to raise the payout to at least 6.82p per share for 2017, from 6.65p for 2016 before lifting it once again in 2018 to 7p.

And if IPP can continue to grow its net asset value per share at a similar rate to that seen over the past five years, the shares have the potential to produce a total return for investors of around 9.2% to 13.4% per annum. This is assuming per share net asset value growth of 5% to 9.2% per annum and a dividend yield of 4.2%. As the shares are currently trading at 156p, a slight premium to net asset value, further share price appreciation might be limited in the near term. But assuming net asset growth continues, it shouldn’t be long before the premium is reduced.

The bottom line

So overall, IPP may not be the market’s most attractive growth investment, but it is a growth stock you can depend on. Steady net asset growth, coupled with the firm’s dividend policy should ensure high single-digit or double-digit total returns for investors. And as economic growth picks up around the world, management should be able to capitalise on more opportunities to invest and generate returns for shareholders. That’s why I’m tempted to buy IPP today. 

The post One ‘hidden’ growth stock I’m tempted to buy today appeared first on The Motley Fool UK.