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Income shares are typically defined as companies that pay attractive dividends. As a result, some investors will take advantage of these stocks and build a portfolio focused on generating income from cash payments. Here’s how someone could start from scratch and build things up over time.
A focus on Asia
One share that could be considered right now is Henderson Far East Income (LSE:HFEL). The investment trust currently has a dividend yield of 9.9%, with the share price up 10% in the last year.
The business (as the name suggests) focuses on investing in Asian companies with dividend potential. It then aims to distribute the bulk of the income received as dividends to shareholders. The share price should closely track the net asset value of the trust’s holdings. So the rise over the past year reflects the fund’s successful stock picking.
Some will criticise the performance recently, saying that if the fund had owned more Asian growth stocks, the gains could have been even higher. This is true, but it misses the point of what the trust was set up for. It’s geared towards sectors like banking and telecoms that operate in mature areas. Instead of crazy capital growth, it’s focused on high-dividend areas.
Looking forward, I think this could do well. Tech valuations are high, and so having exposure to more defensive sectors in the market could help to protect the trust performance if we do see a stock market correction.
Building a proper portfolio
Let’s say an investor had just opened a Stocks and Shares ISA to build a second income. The limit for investing in the ISA is £20k a year. For argument’s sake, let’s say this £20k was allocated all to Henderson Far East Income. In theory, for the coming year, this could pay £1,980 just from the cash.
Over time, I don’t think it makes sense to put everything into just one income stock though. The company has risks. For example, it’s concentrated in just a few sectors, and just in the Asian geography. If this part of the world suffers a slowdown due to China or emerging market volatility, it’s a risk.
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But that doesn’t mean that the ISA can’t aim to generate an average yield of 9.9%. There are other stocks with yields in this region. If an investor included other shares in the portfolio alongside Henderson Far East Income, it would act to diversify the risk.
After a decade of keeping up the £20k annual investment, the portfolio could generate just over £39k in income the following year. Of course, this isn’t guaranteed, as dividends might get reduced in the future. This could mean it takes longer to achieve a certain income goal. However, it shows clearly the potential to grow an empty ISA with the right strategy.
