For income investors, a key metric to assess performance is their portfolio’s average dividend yield. Many aim to have a yield above the FTSE 100 average, or even above the Bank of England interest rate. This isn’t always easy to do, in which case dividend shares with high yields can be added to help raise the overall yield. Here’s how I’d do it today.
A slight tweak can make a large difference
Before I get to the specific stocks I like, it’s key to understand how to supplement an existing portfolio. Let’s say I currently own 10 stocks with equal amounts invested that all pay out dividends. I’m going to assume my yield is the same as the FTSE 100, namely 3.68%.
If I want to try and squeeze more out here, I could add a stock that has a yield of 6%. If I invest the same amount as I did with the other 10 stocks, my average yield would rise to 3.89%. Some might think this isn’t really much of a change.
However, what if I buy three stocks that each yield 7% to supplement my existing 10? In this case, my average yield jumps from 3.68% to 4.45%. Not only do I benefit from the income boost, but it further helps to diversify my risk by holding more shares in my portfolio.
That way, even if one or two firms run into trouble, my overall pot should be well insulated.
A case in point
One idea that ticks the box is the Target Healthcare REIT (LSE:THRL). The stock’s up 9% over the past year, with a dividend yield of 7.11%.
As a real-estate investment trust (REIT), it has to pay out a certain amount of income as a dividend. This makes it appealing as I know the management team will be keen to ensure future dividends get paid.
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The firm specialises in UK care home real estate. As of the end of 2023, it operated 98 properties, with £57.9m in contracted rent and a portfolio value of £911.1m. I see this area of real estate as being quite safe, given the nature of the tenants and lease tenors.
However, one risk is that interest rates could remain elevated for longer here in the UK. This will make it more expensive to service existing debt needed for the properties.
Another benefit is the fact that dividends are paid out quarterly. This is handy as it means I don’t have to wait just once a year in order to bank (or reinvest) the income.
The REIT is one stock I’d buy if I wanted to make changes to my income portfolio and enhance the overall yield. I’d aim to pick another couple of similar ideas in order to further provide an income boost.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK 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.
