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Is this the best income stock to buy this month?

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Henderson Far East Income Limited (LSE:HFEL) is an income stock that does exactly what it says on the tin. The investment trust has been around since 2007. It has increased its dividend every year to investors since then.

Dividend heroes are stocks that pay investors a growing income for 25 consecutive years or more. These stocks are rare like loyal friends to income investors like me. I literally view them as heroic. Henderson Far East Income is not very far away from achieving this milestone.

By the way, this income stock doesn’t merely increase dividends year on year – at some points it pays the highest income in the market. At a point last year, the dividend yield was at 10% -– incredible. That type of inflation-beating real return was virtually unmatched last year.

Currently, the trust is yielding a super-high 8.3% compared to the FTSE All Share yields of 3.46%. I get the feeling this company likes paying its long-term investors.

Positive macro tailwinds

The income stock targets companies with high and sustainable dividends in the Asia Pacific region. This is a positive tailwind, according to its portfolio manager, Mike Kerley. He believes inflation will be more subdued in Asia compared to the inflation pressures in the West. I have also noted that the OECD has the most bullish growth forecasts regarding the Asia (ex-Japan) region.

There are drawbacks, however. A big risk for me is the fact the East Asia hasn’t historically been a great source of cash flows. Even the trust’s portfolio manager sounded more hopeful than expectant regarding the dividend growth potential. He also conceded that the markets were already at relative highs.

A more concerning factor for me is the downtrend in the trust’s asset value over the past five years. The stock has shed 20% of its assets. No wonder the dividends have been so high. I am focused on income so this is not the worst news. But could this capital downtrend continue?

Income stock qualities  

I view Henderson Fast East as an income stock, or income-focused fund. I think it can pay me a growing income throughout the years, regardless of performance. For example, the net asset value of the trust declined in the double digits last year. Despite this, the trust still increased its annual dividend pay out to investors.

Naturally I would suspect the trust of dipping into reserves – an unsustainable move in the long term. But it is not the case as the trust has sufficient dividend cover (enough earnings to cover the income it pays investors).

Diverse exposure

Just because I see an investment company is higher yielding than another does not make it a better long-term investment.

But Henderson Fast East Income is a highly suitable investment for me for several reasons. It offers me the emerging market exposure my portfolio is badly missing.

My portfolio has an increasing emphasis on income and where better for me to look. The income stock has raised its dividend annually for the last 15 years and currently offers a market-leading dividend. On top of that, it delivers investment returns with a low correlation to the wider blue-chip markets.

If I buy income stock, Henderson Far East Income is at the front of the queue.

The post Is this the best income stock to buy this month? appeared first on The Motley Fool UK.

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Henry Adefope has no position in any of the shares mentioned. 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.