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Should I snap up this 9.3% yielding investment trust?

Close-up of British bank notes
Close-up of British bank notes

Buying shares in an investment trust gives me the opportunity of adding exposure to dozens of individual companies. As a private investor with limited funds, I cannot easily spread my investment choices wide and far. But one way to accomplish that is be through buying shares in an investment trust that has stakes in many companies.

Right now, one such trust has a dividend yield of 9.3%. So not only could buying its shares help diversify my portfolio, hopefully I would earn some meaty passive income into the bargain.

Far Eastern focus

The investment trust in question is the Henderson Far East Income (LSE: HFEL).

Over the past year its shares have fallen 14%, helping to push up the dividend yield. But the yield has also improved thanks to dividend growth. Last year, for example, the company’s annual dividend grew 1.7% to 23.8p per share.

That is just the latest in a run of annual dividend increases. Indeed, this investment trust has annual total dividend growth as part of its stated objectives.

Dividends are never guaranteed, however. Last year’s earnings per share of 24.4p barely covered the dividend. That does not surprise me for an income-focussed investment trust, as they often pay out a high proportion of their earnings to fund dividends. They can also even dip into reserves to pay a dividend in a year when earnings or free cash flow are not enough to fund the payout. But it does mean that for Henderson Far East Income to grow its dividend each year, the trust’s own investments need to keep performing strongly.

Well-known names

The company invests in Asian firms like JD.com but also familiar FTSE 100 names with Asian exposure, such as Rio Tinto.

Its portfolio of shares in around 47 companies could offer me exposure to fast-developing markets such as Vietnam and Indonesia as well as China. Such frontier markets can carry risks. The rule of law may not be strong enough to protect investors’ rights, for example.

But I feel more comfortable with the idea of investing in a diversified, professionally managed fund to gain exposure to exciting Far Eastern growth stories than trying to assess such opportunities myself.

There are substantial opportunities for long-term growth in the region. That could help the sorts of companies in which the trust invests make big profits. In turn that may help fund further dividend growth.

Investment trust risks and rewards

There are risks I need to consider before buying any shares in any investment trust. That is true of Henderson Far East Income too.

Some Far Eastern economies continue to struggle with restrictive lockdown policies hurting consumer demand. Inflation could eat into profits. Big miners including Rio Tinto may suffer as the metal pricing cycle falls due to the global economy slowing.

But I like the exposure the trust offers me to a region I believe has strong long-term growth prospects. With a dividend yield approaching double digits, I am also attracted by the income opportunity for my portfolio. If I had spare money to invest now, I would buy shares in this investment trust.

The post Should I snap up this 9.3% yielding investment trust? appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended JD.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022