If someone had £5k of excess funds, here’s how it could be handled.

Thinking it through

The current base interest rate is 3.75%. Someone might aim to achieve over double this return. Let’s say the target was an 8% yield. One way to achieve this would be via a strategy based on banking dividend payments. If a stock costs £100 and pays a £10 dividend each year, the dividend yield is 10%. At the same time, if an investor just owned this share, the annual yield of the portfolio is 10%.

Of course, I’m not saying just buy one dividend share yielding 8% and put all the £5k in it. But when I look at the FTSE 100 and FTSE 250, there are currently 16 companies with yields above 8%. So I think it’s possible to build a diversified portfolio with this as the target yield. Even if one of the examples has a yield of 10%, which could be perceived as high risk, it can be partially offset by a lower-risk stock with a 6% yield. Added together, the same 8% average yield can be obtained.

Granted, dividends aren’t guaranteed. So in the future, the 8% yield could be lower if some companies cut the payments. Part of this can be reduced by owning a broader selection of stocks. Yet it’s a risk, which has to be there given the potential reward of the juicy yield. If an investor’s risk tolerance is too high, it can be adjusted to target a lower overall dividend yield.

A generous yield on offer

Part of making the strategy a success is picking the right income shares. One example to consider is the Sequoia Economic Infrastructure Income fund (LSE:SEQI). As the name suggests, it’s a company that lends to infrastructure projects, making money from the interest income from the loans and bonds.

Over the past year, the share price has been flat, with a dividend yield of 8.72%. The firm’s known for a high dividend yield, supported by relatively high interest rates on its debt portfolio. Put another way, the interest rate payable on many of the loans offered is higher than traditional bank loans, due to the nature of the projects.

Yet at the same time, I wouldn’t say they are very high risk, as the company typically has some security via the physical asset being built. Therefore, it’s in a sweetspot of having predictable cash flows from the interest, but at a higher rate than usual, supporting the generous dividend.

Looking forward, I can’t see the situation changing. The dividend cover’s 1.5, meaning the current earnings per share easily cover the dividend payments. However, in terms of risk, loan defaults are a concern. The top five projects make up 21.44% of the overall portfolio, which is quite high.

Even with this, I still think it’s a good stock to consider buying in pursuit of an above-average yield.

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Sequoia Economic Infrastructure Income Fund (LSE: SEQI) is not exactly a household name. But this specialist infrastructure fund has a market cap of more than £1bn and is a member of the FTSE 250. It also offers a 9% dividend yield, hence my interest.

What does the fund do?

Sequoia Economic Infrastructure Income Fund lends money for infrastructure projects. Examples include data centres, telecoms towers, renewable energy, and other utility projects.

By lending directly to developers and operators, the fund is able to get a good understanding of the risks involved and achieve high income yields.

The fund’s current loan portfolio has a cash yield of 7.5% and is expected to provide a total annualised return of almost 10%.

As an income investor, I’m attracted to debt investments because the risk of big losses should be lower than with equity.

Although some of the fund’s borrowers do fail to repay their loans, most debt is repaid in full. Interest payments are known in advance, unlike dividends.

However, investing in debt is difficult for most private investors, because the amounts of money involved are usually too large. This is one reason why I’m very interested in this investment at the moment. It gives me exposure to areas I’d otherwise struggle to access.

Too cheap to ignore?

The stock is currently trading at a discount of around 20% to the fund’s October 2024 net asset value of 94.4p per share. This discount has lifted the yield to more than 9%.

Without getting too technical, shares in many infrastructure funds are trading below book value due to the impact of higher interest rates. These make loans harder to afford, putting pressure on asset prices. It’s similar to housing, in a way.

There’s a risk that higher interest rates will lead to lower profits from lending and potentially a dividend cut. But this isn’t guaranteed.

If Sequoia maintains its record of loan quality and repayments, it could actually book additional profits as discounted loans are repaid in full.

Over time, investors may also regain confidence in the fund’s ability to lend profitably. That could lead to the shares rising to trade closer to book value, especially if interest rates fall.

One investor who seems confident about the outlook is Richard Sandstrom. He is chief executive of the fund’s investment adviser – the company that manages all the investments.

Sandstrom has spent more than £1m buying the fund’s shares over the last 12 months. His purchases have generally been at prices around 80p, just above the current price.

Buying for passive income

The dividend for the current financial year is expected to be 6.9p per share.

To generate an income of £175 a month, I would need to buy 30,434 shares. That would cost me around £23,100 at today’s prices.

Unfortunately I’m not able to invest quite this much cash in the shares at the moment.

But when Motley Fool regulations allow me to trade this stock, two working days after publishing, I plan to buy a smaller quantity of this high-yield stock for my personal portfolio.

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Yet here’s one FTSE 250 idea that really stands out to me at the moment.

The benefits of the investment trust

I’m referring to the Sequoia Economic Infrastructure Income Fund (LSE:SEQI). The investment trust trades on the stock market just like any other company. Yet the trust focuses on investing in a diverse portfolio of private debt and bond investments. So in buying the stock, I get exposure to a much broader range of opportunities.

Straight off the bat, there’s two advantages here. Sequoia is a well respected investment company, meaning that my funds are being managed by smart people. The other advantage is that I can access income-paying ideas that normally I’d struggle to find as a retail investor.

For example, the private debt deals that provide funds for large infrastructure projects are something that I’m never going to be able to participate in on my own. Yet the coupon and interest payments from these deals can be very attractive. So in purchasing the trust, I can get a piece of the pie and enjoy the benefits.

Points to ponder on

The trust has a strong track record of paying dividends. Even during the pandemic it kept paying out income. This bodes well for the future.

However, I have to remember that the nature of private debt deals is that they aren’t very liquid. What this means is that if money is being borrowed to build a new port, or power system, this can take years. It’s not going to be easy to get the money back quickly if for some reason the trust needs cash.

Talking numbers

At the moment, the dividend yield is 8.41%. This is high, yet isn’t being driven by a falling share price. Over the past year, the stock is down 5%, which doesn’t concern me too much. In fact, the share price is 14% lower than the net asset value of all the investments held.

Let’s say that I invest £200 each month. This would equate to buying 250 shares, given the current share price of 80p. If I kept this up for the next five years, I’d own 15,000 shares. Assuming no volatility in the share price, this would pay me just under £3,000 over the course of the five years. The following year it could pay me £1,274 alone.

This might not be a huge number to some, but remember that this is from a relatively modest investment amount. The yield of 8.41% is something that I’d struggle to get with other stocks or even on a Cash ISA.

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Naturally, inflation erodes the value of my money. So by investing in an asset (such as a dividend stock) that can offset this impact, it can make a lot of sense. Here are two ideas.

Potential for high dividends

As a note of caution, I appreciate that the dividend yield of a stock changes everyday. Therefore, even though the stocks mentioned have a current yield above 7.9%, this is subject to change.

The first one is Energean (LSE:ENOG). The current dividend yield is 8.2%, with the share price down 11% over the past year.

Energean is focused on hydrocarbon exploration and production. The business is doing well, with revenue last year jumping 48% versus 2021. Thanks to a 118% increase in net profit, it has been able to continue regular quarterly dividends.

What excites me is the dividend forecast. The business is looking to increase the payments in line with profits over the coming couple of years. From my calculations, this should push the yield easily above 10%. Granted, it depends on what happens to the share price over this period as well.

As a risk, this sector is known to be volatile. All it takes is for some projects in the pipeline to become unviable and the bubble of optimism can burst.

Big projects, big income

The second share is the Sequoia Economic Infrastructure Income Fund (LSE:SEQI). Listed on the FTSE 250, the current yield is 8.24%. The stock’s dropped 9% over the past year.

As the name suggests, the fund primarily invests in large-scale infrastructure projects. This includes areas such as transportation, power, and utilities. It currently has 66 private debt investments.

Given the income it receives from the money lent, along with some capital appreciation if the projects go well, I feel it’s a strong choice for investors to consider. It has a good track record of paying out quarterly dividends over the past few years.

The share price also trades at a 12% discount to the net asset value (NAV). The NAV reflects the value of all the investments held. Therefore, in the long run, this discount should, in theory, move back closer to zero.

One risk is that the average maturity of a deal is 5.2 years. This means the fund has money tied up for quite a while. If it suddenly needs to generate liquidity, this could prove to be a problem.

I fully accept that using the income from these stocks isn’t a perfect way to beat inflation. Yet in terms of a strategy to help minimise the negative impact it offers, I believe it’s one of the most effective ways in the market right now.

The post Here are 2 dividend stocks yielding more than the inflation rate! appeared first on The Motley Fool UK.

Investing in the future

The first company is the Sequoia Economic Infrastructure Income Fund (LSE:SEQI). Over the past year, the share price has fallen by 17%. The current dividend yield is 8.02%. Of note is the fact that over the past five years, the dividend yield hasn’t fallen below 5%.

Sequoia provides debt funding for infrastructure projects. As such, the sectors involved tend to be the ones with large physical infrastructure needs. These include global transportation, utilities, power and renewables.

Part of the appeal with investing in this fund is the spread of projects across both sectors and timeframes. The average life of funding is 4.2 years. So at any point in time, some investments will be new, while others will be nearing completion. I feel this is a good way to diversify risk, as we aren’t talking about multi-decade projects.

As a concern, the scale of the infrastructure investments means that if something goes wrong, it has a large impact. Further, with debt funding it’s hard to pull out or liquidate quickly.

A short-term dip to buy

The other high-yield option to consider is Close Brothers Bank (LSE:CBG). Down 14% over the past year, it has endured some short-term pressures that have pushed the share price down 20% in the past six months. In part, this has helped to boost the dividend yield to 7.38%.

The main problem the business has been facing is from Novitas, an underwriting subsidiary of the bank. It had to make large provisions for potential credit losses on the lending book of Novitas. It commented back in March that steps have been taken to address the issues, however.

For income investors, the drop in the share price linked to this problem presents a good opportunity to buy the stock with its now-higher yield. I don’t feel that this issue will be a long-term one. Just because provisions have been made for losses, it doesn’t mean those losses will actually happen. In future trading updates, such provisions may be scaled back.

Further, the subsidiary is just one element of Close Brothers. Aside from it, the bank boasts a strong balance sheet. It is also benefiting from the higher interest rates in the UK, something that I expect to continue over the course of 2023.

Even though the risk on stocks is higher than a Cash ISA, I feel investors are fairly compensated via the much higher yields on certain shares. It therefore makes sense for investors to consider the above ideas as a potential alternative, I feel.

The post Forget a Cash ISA! Here are 2 high-yield stocks instead appeared first on The Motley Fool UK.

No, I’m looking for FTSE 250 dividends, and there are some good ones there too. So let’s start with the three biggest forecast yields, based on what Yahoo! Finance says.

#1: Diversified Energy Company

Diversified Energy Company (LSE: DEC) is on a 15.5% yield. The shares have fallen, which boosts it, but they’re still up 15% over five years.

The firm has just posted 2022 results, and raised its dividend by 6%. But it also posted a net loss of $620m. And there are lots of non-cash adjustments in these results.

We saw free cash flow of $219m, but $566m invested in new oil and gas acquisitions.

That’s the core business model, to buy up old gas wells. But it takes a lot of cash to do it. So we’ve seen fundraising this year, and there’s big debt. The balance sheet shows $1.17bn in borrowings.

The yield looks attractive, but I can’t square it with this unusual cash flow model. I just can’t tell if it’s sustainable, so it’s a no for me.

#2: Target Healthcare REIT

Target Healthcare REIT (LSE: THRL) is one I do understand. It’s a real estate investment trust, and owns care homes in the UK, which it rents out.

The recent share price fall is surely due to the market shunning anything related to property. But it’s helped boost the dividend yield, to 9.7% now.

Forecasts suggest the trust should maintain it in the next two years too, so that looks good.

The valuation is a bit high though, with a price-to-earnings (P/E) ratio of around 30. And that’s the biggest risk for me.

Still, it’s predicted to fall next year. But it’s early days to be trusting 2024 forecasts too much. As for 2023, Target is due to post first-half results on 27 March.

I rate this one as a buy candidate for long-term income investors.

#3: Sequoia Economic Infrastructure Income Fund

The third biggest FTSE 250 yield comes from Sequoia Economic Infrastructure Income Fund (LSE: SEQI). This time, we’re looking at an 8.6% yield.

Sequoia is a fund that puts its money into various debt-based investments. It’s mostly based on funding infrastructure projects.

And that could explain why the share price is down 24% in five years. You know, that pandemic thing and the chaos it caused.

I’d need to dig a lot deeper into the business model and the books here. But at least with this one, I don’t see anything weird at first sight.

The fund’s February net asset value came in at 93.1p per share, a bit down on January. But that puts the shares on a discount of 14%. It looks good to me, but I need to do more research.

Verdict

I think there are a lot of overlooked income shares in the FTSE 250. But there’s more risk too.

A few weeks ago, the top three would not have been the same, but we’ve seen dividend cuts.

Still, I like the look of two of these three, at least.

The post 3 dividend shares with the biggest FTSE 250 yields. Time to buy? appeared first on The Motley Fool UK.

Dirt cheap stock?

The company is called Sequoia Economic Infrastructure Income Fund (LSE:SEQI) and looks for investment opportunities in a range of different sectors. It’s highly diversified, which is great for low-risk investors such as myself. For example, when it looks at construction projects, it has a limit of no more than 20% of its total capital. 

The share price has taken a tumble since the pandemic. The fund is currently down 27.4% from its all-time high in January 2020. Is it undervalued? Here’s what I think.

An excellent dividend yield

Sequoia’s core business model is to provide financial loans for a wide range of infrastructure projects. That might mean a new offshore wind farm off the coast of Scotland or a modern student housing block in the Netherlands. 

The company finds value in sectors that put off traditional lenders, usually because risk assessment is difficult. That said, all projects are located in countries in Western Europe or Anglophone countries like the US and Australia. 

The dividend yield is currently at an impressive 7.9% and the company stated in its latest tradings update that it wants to “hold the payout at its current level”.

The portfolio yield for 2022 – the amount the fund generates from investments – was 8.4%, which is in line with its target of 8%-9%. This covers the current dividend yield comfortably. And there is good news in the company’s future, too.

A rosy future?

A potential catalyst is the ongoing increase in interest rates. High interest rates are good for lenders. As the fund lends money, an interest rates rise can increase the net income. In fact, Sequoia themselves state: “These higher interest rates will, all things being equal, result in an improvement in the cash dividend cover ratio. Over time, this may lead to NAV growth, or the opportunity to increase the dividend, or both.”

Interest rates are already at 3.5% in December 2022 and 10.5% inflation seems like it will cause further rises. And with the pandemic now firmly in the rear-view mirror, macroeconomic trends look rosy for lenders like Sequoia. 

Is it a buy?

As Sequoia is a dividend stock, it seems unlikely we’ll see much growth here. And my strongest argument against Sequoia is that with the strong recent FTSE 250 performance, I’m seeing fantastic growth opportunities left, right, and centre. 

Of course, a diversified portfolio is always a good thing. And with Sequoia offering a high dividend and attractive value, I’ll look to open a position next time I have spare cash available.

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