The highest yielding trusts that buy shares can help investors beat the cost-of-living crisis.
High inflation is not only eating away at the real value of bank balances, but also sending stock prices lower as investors factor in the impact of higher interest rates.
However, one way investors can counter the corrosive effects of higher prices is to own stocks that pay good dividends. Not only does a steady income stream provide cash to spend or reinvest, but as share prices have fallen, yields have risen, making now a great time to hunt for income.
Stifel, the stockbroker, calculated that there are 25 investment trusts which buy shares that yield more than 4%. This is three more than six months ago, reflecting dividend growth and higher yields after share price drops.
This list includes Super 60 members City of London and Murray International, which yield 4.5% and 4.3%. City of London is a “dividend hero” having raised its payout for 55 consecutive years. Murray International, managed by Bruce Stout, has a 16-year record of rising income payments.
- Bruce Stout: our high yield defends against inflation
- Bruce Stout: why I think UK shares are not a buy
- Five reasons why investment trusts are different from funds
But the list is not only filled with UK and global stock trusts. The 25 trusts invest in a wide range of areas, such as mining stocks via BlackRock World Mining (yielding 6%), biotechnology stocks via International Biotechnology (4.8%), and Asia shares such as Henderson Far East Income (8%) and abrdn Asian Income (4.3%).
Stifel said: “For those investors prepared to take equity risk, the yields on these trusts may be attractive at a time when interest rates remain relatively low, despite recent upward moves.
“The majority of these trusts offer exposure to overseas markets as an alternative to the UK. Many of them also have substantial dividend reserves, and have a good record of delivering annual dividend growth.
|Trust||Yield (%)||Premium/discount (%)|
|Henderson Far East Income||8||2.9|
|JPMorgan China Growth & Income||6.4||1.1|
|Henderson Diversified Income||6.1||-7.5|
|JPMorgan Japan Small Cap Growth & Income||6||-7.8|
|BlackRock World Mining||6||3.5|
|Montanaro UK Smaller Companies||5.9||-14.6|
|Henderson High Income||5.7||1.9|
|abrdn Equity Income||5.6||-3.9|
|JPMorgan Asia Growth & Income||5||-8.7|
|BlackRock Latin American||4.9||0.5|
|City of London||4.5||3.2|
|abrdn Asian Income||4.3||-10.9|
|Schroder Income Growth Fund||4.1||-1.6|
|BlackRock Sustainable American Income||4||
Source: Stifel/Datastream, 30 May 2022. Excludes trusts under £100 million market cap
Revenue reserves a key advantage for trusts
Stifel notes that some of these high-yielding trusts have meaningful revenue reserves. These can be drawn on to maintain or increase dividends at times when there are dividend cuts at the portfolio companies in which they invest.
A feature of investment trusts and not open-ended funds, these reserves can be used to smooth out dividends if necessary. Stifel says this is a reason that investment trusts can deliver a more robust level of dividend than similar unit trusts and open-ended funds.
For example, Murray International’s revenue reserve totalled £63 million at the end of 2021, equivalent to almost one year’s annual dividend cost of around £70 million.
Stifel calculated that eight of the trusts on the list paid dividends as a fixed percentage of the net asset value (NAV). Typically, these pay out 4% of NAV per annum as a dividend, often calculated using the NAV at the trust's year-end.
- The fund and investment trust sectors with the highest yields
- Five tips to cope in a bear market
- A tactic to ride out the inflation storm using these funds and trusts
The broker said that investors needed to be aware that in years when the NAVs on these trusts fall, the total dividend paid and the prospective yield in the following year are also likely to decline.
The trusts paying out a fixed share of NAV are: European Assets, JPMorgan China Growth & Income, JPMorgan Japan Small Cap Growth & Income, Montanaro UK Smaller Companies, JPMorgan Asia Growth & Income, BlackRock Latin American, International Biotechnology and Invesco Asia.
A number of these trusts are also “manufacturing” yield through a policy of paying these dividends which are at a level higher than the revenue per share of the trust. Therefore, they are funding the revenue shortfall by paying out of their capital. Stifel said this included Montanaro UK Smaller Companies (LSE:MTU), which yields 5.9%.
Trust investors can bag higher yields by moving away from straightforward equities and into “alternative” assets. These include infrastructure and property, as well as more complex areas such as private debt.
The highest-yielding sector, according to financial data firm Morningstar, is “direct lending”. Here, investment trusts lend money directly to small businesses, or invest in funds that do so, at higher interest rates than large companies receive, which increases both returns and risk.
Other high-yielding trusts include healthcare property trust Target Healthcare REIT with a 6% yield, commercial property trust AEW UK REIT at 6.7% and Schroder European Real Estate at a whopping 7.9%.
However, interactive investor’s head of fund research Dzmitry Lipksi notes that “alternative” assets should be capped at 10% of a portfolio and investors should only invest in what they understand.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.