A sustainable focus

Three of the four come from the renewable energy space. These are Foresight Environmental Infrastructure (10.95%), the Renewables Infrastructure Group (11.12%), and Foresight Solar Fund (12.74%). The dividend yields are shown in brackets. The first two have seen single-digit percentage share price moves lower over the past year, with Foresight Solar down 22%. This shows the theme over the past year: a lack of interest in renewables, particularly solar.

However, the divdiend per share for all the companies has increased over the past five years. This shows me that the problem isn’t the businesses’ fundamental operations, but rather sentiment towards the sector. With the share price lower, the divdiend yield increases.

For long-term ISA holdings, I think now could be a good time to consider buying. Electricity demand is surging, with growth in AI data centres and related AI projects. Renewables are likely going to become a key way to meet this demand. Further, recent geopolitical tensions in the Middle East highlight the sensitivity of using oil and gas. I believe this could encourage people to diversify away from these traditional sources of energy.

One risk for these firms is an increase in interest rates. The projects are capital-intensive, with loans taken out to help fund them. If high energy prices feed through to inflation, it could force UK interest rates higher this year, increasing debt servicing costs.

Switching sectors

Another UK stock in focus is the TwentyFour Income Fund (LSE:TFIF). The investment manager focuses mainly on buying and selling asset-backed securities. This includes products like mortgages and corporate loan packages. It earns interest on loans and other structured forms of credit. Given that they are higher risk than some other forms of debt, the interest charged is significantly higher. As a result, it’s able to pay out a large portion of this return through dividends. This is reflected in the current yield of 10.33%, with the share price down a modest 3% in the past year.

The dividend cover ratio is 1.1 right now, meaning that current earnings easily cover the dividend per share. This is one of the reasons I think the yield is sustainable going forward. Of course, a major risk is if the company incurs loan defaults. This would be negative for the stock and is a risk that can’t be avoided. Yet the fund went public in 2013, so it has a long enough track record to make me feel comfortable.

Overall, I think all four income stocks could be considered for either the end of the ISA year, or ones to kick off the new ISA year in April.

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Filtering carefully

There are currently 27 stocks that fit the initial filter of having a yield of 6.5% or higher. However, I don’t believe all 27 are worth buying. Some in that mix have a high yield right now because their share prices have tumbled 30% or more over the past year. This has artificially boosted the yield, but I think business troubles could lead to a dividend cut in the near future. Therefore, an investor would likely want to avoid those companies.

Within the sustainable-yield group, the next thought is which sectors do I like? A company might have a good track record for income payments, but if I think the sector is going to underperform in the coming years, it might not be a great pick. In my view, finance, telecoms, and renewable energy are three areas that could do well in the coming years.

After adding in that sector filter, I can now clearly see companies with a generous yield that operate in a space I think will do well. This is the sweet spot. In terms of individual names included in this bucket, Ashmore Group (6.88% yield), Telecom Plus (6.95%) and Greencoat UK Wind (10.98%) could all be considered.

Ideally, an investor could look to include these as part of a larger diversified portfolio. The benefit is that if one company cuts its dividend in the future, the overall negative impact on the portfolio is manageable.

Digging deeper

Another example that could be considered is the TwentyFour Income Fund (LSE:TFIF). The stock is basically flat over the past year, but it boasts a high yield of 9.85%. The fund managers focus on buying asset-backed securities, such as loans for cars, mortgages, and other forms of consumer debt.

These securities pay a high coupon, given the risk of these loans is often higher than that of more traditional debt. However, the fact that the loans are collateralised by assets such as cars and houses means that even if someone defaults, it can help recover some of the loss. It holds 173 investments as of the latest company update, indicating a well-diversified portfolio.

As for dividends, the company pays out almost all of the profit it generates each year to shareholders. That means dividends are largely funded by real cash interest, not capital. That’s a key element in keeping it sustainable going forward. Further, the company has met or exceeded dividend targets every year since its launch in 2013! So, although past performance doesn’t guarantee future returns, the track record does speak for itself.

In terms of risks, the debt and bonds bought depend on consumer and corporate health. So if we get an economic downturn with higher unemployment or housing stress, it could quickly result in higher loan losses.

Even with that concern, I think it’s still a dividend stock with a high yield for investors to consider.

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That’s what it should deliver, if it can simply maintain its dividend levels of the past few years. And we’ll know on Friday (5 December) when the trust delivers full-year results.

It’s the kind of dividend return that could help build a Stocks and Shares ISA into a big contributor to our long-term retirement income, especially if the cash is reinvested.

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.

European business

The real estate investment trust (REIT) invests in leased office, retail, and other business properties across major European cities. That does expose it to some struggling economies. But against that, it helps reduce overall geographic risk. Unlike UK-based REITS, it’s not at the mercy of the Bank of England or the Chancellor of the Exchequer.

At the interim stage, Chair Sir Julian Berney said: “Despite the company’s fundamentals being solid, supported by strong asset management that has consistently enabled the provision of high stable income for shareholders, the company’s shares are continuing to trade at a persistent discount to NAV.”

With an estimated current net asset value per share of 99.8p, we’re looking at a 37% discount at the time of writing.

Yes, there’s both property risk and risk from European economic weakness. But the dividend yield and discount to NAV have to make it a serious long-term ISA consideration.

Sticking with Europe

TwentyFour Income Fund (LSE: TFIF) is a FTSE 250 investment company. And it invests mostly in asset-backed securities (ABS) in the UK and Europe. It is, though, expanding into Australia and the US too.

It goes for things like mortgages held by smaller financial institutions, credit card debt, and often things with a bit more risk in the pursuit of superior income returns.

The dividend yield has fallen a bit with the shares having risen nicely in the past couple of years.

But November’s first-half results included a 4p interim dividend and reiterated plans for 8p total for the year. So even after recent share price gains, that’s still a 7.1% yield.

Growth opportunities

The company also raised new funds for investment of £64.3m in the first half through a new equity offer.

We heard that: “Despite continued political and fiscal uncertainty, strong supply and demand for ABS remains. Proposed regulatory changes in Europe are likely to further underpin that demand from banks and insurance companies over the longer term.”

In this case, the shares trade at a slight premium to NAV of 1.9%. So that has to suggest some valuation risk.

And though the board is clearly optimistic about the ABS market, such assets do carry risk of defaults that traditional company stocks and corporate bonds don’t.

I definitely wouldn’t rate TwentyFour Income as ideal for risk-averse investors. But for those wanting to spice up their dividend stocks selection and who are well diversified, it has to be one to consider.

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The tricky part comes when yields stretch far higher. A simple rule of thumb is that the yield should ideally be less than double the 10-year gilt yield. If it’s much more than that, it could be a warning sign that the income looks too good to be true.

It’s also important to dig deeper than the headline number. Is the company generating enough earnings and cash to support those payouts? Does it have a sensible level of debt? And perhaps most crucially, is there long-term demand for its products or services?

With those questions in mind, here’s one FTSE 250 stock I think is worth a closer look.

Investing in asset-backed securities

TwentyFour Income Fund (LSE: TFIF) is a closed-ended investment company that focuses on riskier but higher-yielding UK and European securities. Typically, such securities cover things like credit card debt and mortgages held by smaller banks and credit unions.

Right now, the fund boasts a dividend yield just shy of 10%. For investors targeting passive income, a stock like this could give a major boost to the overall portfolio yield.

That said, it’s no use if the share price drifts lower or if dividends get slashed. Encouragingly, this fund looks more stable than many of its high-yield peers. The payout ratio currently stands at a sustainable 79% and the fund has built an impressive track record. Nine years of consistent payments, including five straight years of dividend growth, suggest management’s committed to shareholders.

The share price has also remained remarkably steady. Over the past decade, it’s traded in a tight band between 100p and 120p, which is unusual for such a high-yielding vehicle.

Add to that minimal debt, strong cash flow and a valuation that looks fair, with both the price-to-earnings (P/E) and price-to-sales (P/S) ratio sitting at around 7.5.

Based on those factors, there seem to be plenty of reasons for investors to consider this fund.

The risk investors should weigh up

Of course, there are risks to check out. TwentyFour Income Fund invests in structured credit products, including sub-investment grade tranches of asset-backed securities (ABS) and residential mortgage-backed securities (RMBS). That means if the underlying borrowers default, the fund’s income could take a hit.

This isn’t a fund for the faint-hearted. Exposure to these asset classes can be rewarding, but they carry greater uncertainty than traditional corporate bonds or blue-chip dividends. Investors need to weigh up the risk and reward carefully.

The bottom line

In my view, TwentyFour Income Fund’s one of the more interesting high-yielding stocks on the FTSE 250. It’s unusual to see a near-10% dividend yield paired with a history of steady share price performance and consistent payouts.

It won’t suit every investor, and it should only ever form part of a diversified portfolio. Still, for those searching for a way to boost an average yield, I think it’s a stock worth considering.

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The key is to reinvest the annual dividend cash and let the magic of compounding grow the total year after year. And putting it in an ISA means we can invest up to £20,000 each year and not pay a in penny tax when we finally take it out — no matter how much we accumulate.

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.

Nearly 10% a year

Today, I’m using TwentyFour Income Fund (LSE: TFIF) as an example to see how much we might be able to earn with this strategy. It’s currently on a forecast dividend yield of a whopping 9.9%. And that alone would be enough to bring in £1,980 in the first year.

But here’s where it really gets interesting. If we put that £1,980 to work by buying more TwentyFour Income stock, we’d be starting the next year with £21,980 in shares. And assuming the dividend yield stays the same, our second year of dividend income would amount to £2,176.

The year after that we could have another £2,391 dividend cash to reinvest in new shares.

And by the 10th year, we could be up to an annual £4,631 and still rising. That’s a 23% return in one year on the initial £20,000 investment — and without putting in even a penny of extra cash. Invest more each year, and our returns should multiply further.

Share performance

The share price is up only around 12.5% since the fund was launched in 2013. It seems we’re sacrificing capital gains for dividends. And it’s a shame the shares haven’t risen much in 12 years to add to our profit. Or is it?

Billionaire investor Warren Buffett once famously asked: “If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?“

The answer seems clear, yet many investors get it wrong when they think about shares. If we plan to keep investing over the long term, we can buy more if prices fall. So the lackustre performance of the TwentyFour Income share price could actually boost our long-term gains by enabling us to build up a bigger pile of shares.

No guarantees

It’s time for a few cautions. No dividends are ever guaranteed. But this one does have a decent track record. It’s a bit up and down, but the general trend is up. Remember however, there’s always a risk of dividend cuts.

This fund invests in asset-backed securities, including mortgages, loans and debt-based derivatives. And I wouldn’t put too much of my investment cash into something as risky as the debt market. Some of the things the fund buys are quite complex and come with some danger.

So I’d spread my risk across a range of companies in different businesses. But I do think investors could do well to consider TwentyFour Income fund as part of a diversified ISA portfolio.

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Elevated risk but high returns

The first is the TwentyFour Income Fund (LSE:TFIF). The investment trust specialises in buying higher-yielding, asset-backed securities. These include things like mortgages and collateralised loan obligations. Given that most of these securities pay out interest, the fund can generate strong cash flow, which it then pays to shareholders in the form of dividends.

The stock’s up 8% over the last year, with a dividend yield of 9.87%. One of the reasons why the yield’s so high is due to the nature of the assets being bought and sold. These loans and other debt products can be pretty risky. Therefore, the interest rate charged on them is much higher than normal. As a result, the overall yield that the portfolio produces is also high.

Of course, this can be seen by some investors as a key risk in the future. Even though the company owns a wide range of assets to diversify the concerns around defaulting, it’s still not perfect. Some of the securities used, such as credit default swaps, are very complicated financial instruments that can go badly wrong.

Even with this risk, the yield’s exceptionally high. Importantly, the fund has consistently grown its dividends, and revenue reserves are positive. This supports continued dividend payments from now on, due to the strong track record.

Predictable cash flows

A second option is SDCL Efficiency Income Trust (LSE:SEIT). Like TwentyFour, it’s an investment trust. In this case, it focuses on projects designed to reduce energy consumption and carbon emissions, while generating predictable, inflation-linked cash flows.

Over the past year, the stock’s down 8%, with a dividend yield of 10.95%. Part of the bump higher in the yield can be attributed to the share price fall over this period. Some of this move can be attributed to a general hit to sentiment for renewable infrastructure trusts. Also, concerns about interest rates staying higher for longer have negatively impacted the stock. After all, SDCL partly finances these large projects with debt. If interest rates do remain elevated, the costs of servicing the debt’s expensive.

Even with these risks, I think the stock’s a sustainable dividend payer. The predictable cash flows from secure, multi-year agreements mean steady revenue streams. In time, this filters down to consistent income payments. Also, many of the contracts are indexed to inflation, meaning that they can support real dividend growth. Further, it has solid clients, who are often investment-grade companies or public bodies, lowering default risk.

When I put all of this together, I don’t see the dividend as being under immediate threat. Both companies have a high yield and can be considered by investors for inclusion in a portfollio.

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Not only can they deliver regular income but also the possibility of capital growth over time.

However, while a high dividend yield might be promising for shareholder returns, it can also be a red flag. Exceptionally high yields sometimes indicate a share price under pressure or unsustainable payout ratios. As such, investors should assess the underlying fundamentals carefully before relying on yield alone.

One FTSE 250 stock that’s caught my attention recently is Twenty Four Income Fund (LSE: TFIF). With a staggering dividend yield of almost 10%, it appears to offer both income and value – but does it have the resilience to deliver over the long term?

A top-performing FTSE 250 dividend gem

Twenty Four Income’s a closed-ended investment fund that focuses on asset-backed securities, primarily in the European and UK credit markets. It aims to provide attractive risk-adjusted returns while generating a high level of income for shareholders.

Over the past five years, the share price has risen by 22%, supported by strong performance and an experienced management team. Out of every 10%-plus-yielding FTSE 250 stock, it’s the only one that has enjoyed positive price growth over five years.

More impressively, its dividend has grown at an average annual rate of 5.23% over the past decade — a clear signal of sustainability and long-term commitment to income investors.

Latest results and ratios

In its latest full-year results, the fund posted revenue of £52.7m and a net profit of £136m, a significant turnaround from the £22.6m loss recorded the previous year. These figures point to robust management and an effective investment strategy during a period of rising interest rates and economic uncertainty.

With a price-to-earnings (P/E) ratio of just 6.2, the price looks undervalued with decent growth potential. This is further supported by a return on equity (ROE) of 16.65%, suggesting efficient use of capital.

What could go wrong?

As always, investments come with risk. Despite the attractive yield and solid performance, Twenty Four Income’s no exception. It invests in credit markets, which are sensitive to economic conditions, interest rate changes and liquidity fluctuations. Any deterioration in asset-backed security valuations or a spike in defaults could impact earnings and future dividends.

Additionally, high-yielding funds are often exposed to leverage and interest rate risk. While the fund has navigated recent volatility effectively, the outlook for fixed income markets remains uncertain.

An opportunity to consider?

For investors like myself who consistently search for reliable dividend stocks, I think Twenty Four Income Fund’s an intriguing option to consider. Its combination of double-digit yield, long-term growth and strong profitability suggests it could make a good addition to an income-focused portfolio.

That said, no investment should be made in isolation. It’s essential to conduct thorough market research and aim for a diversified portfolio to reduce sector-specific risk – especially when dealing with high-yield assets.

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If an income-hungry investor had £2,000 to tuck away, should they consider splitting it between these two?

Foresight Solar Fund shines

First up is Foresight Solar Fund (LSE: FSFL), an investment trust that currently offers a red-hot trailing yield of just over 10.3%. 

The company invests in solar farms and battery storage, with 58 sites spread across the UK, Spain and Australia. 

Despite a gloomy 2024 for sunshine, the UK’s worst since 2013, Foresight still hit its 8p dividend target. And that’s covered 1.4 times by earnings.

Management has pencilled in an 8.1p dividend for 2025 and expects that to be covered 1.3 times. That gives me some confidence the yield may hold up, although as ever, these things are never guaranteed. 

The board is actively hedging electricity prices, locking in 88% of 2025 revenues and 69% for 2026. Of course, this doesn’t remove all risk. If electricity prices plunge or the group’s planned Australian asset sale is delayed further, that could squeeze cash flow. 

With net asset value slipping to £634m from £698m the year before, there’s pressure to deliver on disposals and keep investor confidence high. 

Still, I think income-focused investors might consider this one. Especially with those hedges in place and dividends forecast to keep rising. They should also remember that renewable energy can be a volatile sector, there’s a bit of a backlash against net zero, and falling fossil fuel prices may up the competition. The shares are down 15% over one year and 25% over five, wiping out much of the income.

Foresight Solar Fund looks cheap as a result, trading at a whopping discount of almost 30% to underlying net asset value. As ever with discounts, there’s no guarantee this will narrow.

TwentyFour Income Fund

The TwentyFour Income Fund (LSE: TFIF) is a very different beast. This Guernsey-based investment trust focuses on European asset-backed securities, pools of mortgage and loan repayments bundled together and sold as investments. That might sound complex, but the appeal is clear: a fat dividend.

The fund just paid a record 11.07p over the past year, giving it a 10.1% yield at the current share price. It’s been a strong performer in a niche part of the bond market, with total returns last year of 16.9% including dividends.

Crucially, this fund operates a full payout model: all income gets passed on to shareholders. But that also means there’s no buffer if things go wrong. 

If defaults rise or liquidity dries up, the dividend could come under immediate pressure. Still, with £840m in assets and only £26m in liabilities, the balance sheet looks reassuring. This dividend could endure too, but as ever, there are no guarantees.

Investors might consider buying this one for income, although I’d want to keep a close eye on the economic outlook. European asset-backed securities can be lucrative, but they’re not immune to volatility. There’s no discount here, the trust trades at a narrow 0.36% premium to underlying net asset value. I actually find that reassuring.

Both funds sit on eye-catching yields and have delivered income in tough conditions. I think they’re worth considering but only for experienced investors who already have a diversified portfolio and are looking for something a little different with bags of passive income.

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Today, I’ve uncovered two mid-cap shares on the UK’s smaller indexes that could provide lucrative dividend returns.

But I’m not just going on the yield — both these shares have impressive return on equity (ROE) and a price-to-earnings growth (PEG) ratio below one. This shows they use their equity efficiently and are well-priced relative to earnings growth.

Let’s dive in.

Polar Capital

Polar Capital (LSE: POLR) seems like a small outfit on the face of things, with a market cap of only £400m. But it’s a major London-based fund manager with upward of £23bn in assets under management (AUM). Not only that, its AUM has grown almost 10% in the past year — during a period when many fund managers have experienced reduced AUM.

One risk is that the fund is largely focused on healthcare and technology, much of which derives revenue from the US. With new trade tariffs in place, these stocks may suffer, passing on losses to Polar Capital.

Price performance might not look that great at first; it’s up less than 10% in the past five years. But when adjusted for dividends, the full return on investment (ROI) rises to 57.23%. That equates to an annualised return of 9.86% per year — not bad!

Of course, there’s no guarantee that performance will continue. But annual dividends have increased 80% in the past 10 years, which is promising. Currently a meaty 11.4%, its dividend yield typically fluctuates between 7% and 15%.

Twenty-Four Income Fund

Twenty Four Income Fund (LSE: TFIF) is a relatively young investment company established in 2013 in Guernsey.

Its focus is on European asset-backed securities (ABS) with low liquidity and high yields. This strategy gives investors exposure to a segment of the fixed-income market that is often overlooked yet potentially valuable.

Consequently, the fund maintains a high and stable yield between 9% and 10%. Over the past decade, its final dividend has grown from 6.38p to 9.96p at a rate of 3.4% per year.

However, the focus on asset-backed securities (ABS) and mortgage-backed securities (MBS) also adds a moderate level of risk. Not only can they lack liquidity, but they are also sensitive to the quality of the underlying loans. If borrowers default, the fund’s income and capital could be affected. Reduced income can lead to dividend cuts.

As is common with dividend-focused funds, the share price has enjoyed only moderate growth of 30% in the past five years. However, total returns reach almost 87% when adjusted for dividends, equating to annualised returns of 13.3% per year.

While both the above stocks have experienced historical losses due to market downturns, I think they are worth considering for the high and reliable dividends. For investors looking to build a steady passive income stream, a reliable dividend history with consistent growth is a key element to look for.

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When I consider the potential investment yields on offer for a second income, I always set a Cash ISA as the benchmark. At the moment, the best easy access rate I can find is 5.1%. Given that the risk of loss of capital is low, alternatives like dividend stocks need to pay me a higher yield, given the fluctuations in share prices. Based on the current market, I think I could potentially earn a yield of 10%. Here’s the lowdown.

Using the power of diversification

It might surprise some to know that there are currently five stocks in either the FTSE 100 or FTSE 250 that have a dividend yield above 10%. I could simply invest in these options and call it a day. However, five income stocks in a portfolio isn’t that diversified. If one of those five decided to cut the dividend, my income would fall by 20%.

After all, we’re talking about ultra-high yield dividend shares here. The risk is higher than with companies with a lower yield. Therefore, I want to try and add more to the pot. This isn’t impossible and can actually be done fairly easily.

For example, Ithaca Energy has a dividend yield of 16.72%. The TwentyFour Income Fund (LSE:TFIF) has a yield of 9.33%. Even though this is below the 10% threshold, if I invest an equal amount in both stocks, my average yield becomes 13.03%.

Therefore, I can build my portfolio up using similar companies and still have an average yield at 10% even though some of the individual shares have a yield below my target.

A contender to include

In terms of a stock I’d look to include if I was pursuing this strategy, the TwentyFour Income Fund would definitely be on the list.

I’d use the stock as a sustainable dividend payer. It has a strong track record of consistent payments over several years. It typically pays out funds on a quarterly basis, which I see as a positive as it avoids me having to wait an entire year to get paid.

The fund primarily invests in asset-backed securities. As the name suggests, these are financial products that have some form of protection attached. For example, a mortgage is an asset-backed security. The owner of the loan gets paid interest, but also has the physical property as an asset in case of default from the borrower.

By targeting high-yield securities, TwentyFour can generate good levels of income that can be paid out to shareholders on a regular basis. The share price should reflect the overall value of the portfolio. Over the past year, the stock is up 8%.

As a risk, the firm does have exposure to areas like student loans and credit card debt. There’s a higher chance of default and so the company needs to carefully choose what to invest in.

Weighing it all up

I’m not going to claim that this portfolio averaging 10% is a low-risk idea. But I do think that it goes to show that with some imagination and research, I can make my money work harder than simply putting it in a Cash ISA.

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