A well-covered 7% dividend yield and 16 years of growth! Is this the best income stock in the UK?

A high dividend yield can be tempting, but I always dig deeper before committing to any income stock. After all, if a company isn’t growing its payout over time, inflation can quietly eat away at returns. That’s why I place just as much weight on dividend growth and payout sustainability as I do on yield itself.

Aberdeen Asian Income Fund (LSE: AAIF) stands out on both fronts. It offers a chunky 7% yield, backed up by 16 years of continuous dividend increases and an average annual growth rate of 22%. Better still, its payout ratio of 67% suggests that the dividend is comfortably covered.

This puts it ahead of many other income-focused investment trusts. For example, the Value and Indexed Property Income Trust yields a solid 6.6% and boasts an even longer 19-year growth streak. But its 96% payout ratio and much slower 4.5% growth rate make me less confident about its future increases. Aberdeen Equity Income is another option, but in terms of both growth and yield, Asian Income looks more compelling.

So, what exactly does Aberdeen Asian Income invest in?

Asian market diversity

As the name suggests, it focuses on dividend-paying companies across Asia, with a well-diversified portfolio spanning Taiwan, China, India, South Korea, and Singapore. Top holdings include some of the region’s most established businesses, such as TSMC, DBS, Tencent, and Samsung. Management takes a quality-over-quantity approach, focusing on companies with strong balance sheets, reliable cash flow, and a long-term track record of shareholder returns.

While its share price has only climbed 21% over the past five years, the total return including dividends is 60.8% — well ahead of the MSCI Asia Pacific benchmark. It’s not a growth rocket, but as a steady income stock, it has delivered impressive results.

Valuation and costs

On a valuation basis, the trust looks reasonable, with a price-to-earnings (P/E) ratio of 10.46 and a price-to-book (P/B) ratio of 0.89. Its financials are also reassuring: a 35% free cash flow margin, 8.8% return on capital employed (ROCE), and a strong balance sheet with £416m in assets versus just £38.9m in liabilities.

But investors should be aware of the discount and fees. The shares have consistently traded at 10% to 15% below net asset value (NAV) for the past year, which may reflect broader caution around Asian equities. The trust also carries a total fee burden of 1.6%, including a 0.75% annual management fee and a 0.85% ongoing charge. This can seriously nibble away at net returns over time.

Broader Asian market outlook

The fund’s future naturally relies on growth in the broader Asian market. In light of this, there are some encouraging signs, including easing tensions between the US and China and improving trade conditions.

However, geopolitical risk remains elevated. Any escalation in Taiwan or instability in the region could weigh on sentiment. Currency fluctuations and regulatory differences also add complexity.

My verdict? While Aberdeen Asian Income ticks a lot of boxes as a dividend yield play, I’m not convinced. It’s well-managed, diversified, and has a consistent track record of growth. But the high fees and uncertain outlook for Asian equities mean I’m not rushing in.

I think it’s worth a look for investors specifically seeking Asian market exposure — but for me, I think there are better income options closer to home.

The post A well-covered 7% dividend yield and 16 years of growth! Is this the best income stock in the UK? appeared first on The Motley Fool UK.

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Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has recommended Taiwan Semiconductor Manufacturing. 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.