Interactive Investor

28 investment trusts yielding 5% or more: the key things to consider

High yields are tempting, but it is important to look under the bonnet to assess sustainability, as Kyle Caldwell explains.

23rd January 2024 09:35

Kyle Caldwell from interactive investor

For the first time in more than a decade, income seekers are spoilt for choice, as equities are no longer the only game in town to procure high yields.

Cash-like investments, such as money market funds, are typically offering yields of 5%, while the types of bonds viewed as the lowest risk, such as gilts, are offering similar levels of income. Those who move further up the fixed-income risk spectrum will find higher yields. Bond yields across the board have been driven higher by interest rates rising notably over the past two years.

In the case of investment trusts that predominately invest in equities, there’s 48 with yields of 4%-plus.

More than half – 28 in total – have dividend yields of 5% or higher, as shown in the table below.

Among the 5%-plus yielders are long-established UK equity income portfolios Merchants Trust (LSE:MRCH), JPMorgan Claverhouse (LSE:JCH), and City of London Ord (LSE:CTY). The trio are dividend heroes having consistently raised payouts for decades. 

Most of the highest yielders invest in UK dividend-paying companies. Nine trusts from the UK equity income sector have 5%-plus yields. As well as the aforementioned dividend heroes, the other six trusts that feature in the table are Chelverton UK Dividend Trust (LSE:SDV), abrdn Equity Income Trust (LSE:AEI), CT UK High Income (LSE:CHI), Shires Income (LSE:SHRS), Lowland (LSE:LWI), and Schroder Income Growth Fund (LSE:SCF).

Investment trusts primarily investing in equities with a dividend yield of 5%-plus 

Investment trust

AIC sector

Yield %

Discount/ premium

Henderson Far East Income (LSE:HFEL)

Asia Pacific Equity Income

11.5

-4.5

Marwyn Value Investors (LSE:MVI)

UK Smaller Companies

10.8

-49.9

British & American (LSE:BAF)

Global Equity Income

9.2

19.0

Chelverton UK Dividend Trust (LSE:SDV)

UK Equity Income

8.3

4.3

abrdn Equity Income Trust (LSE:AEI)

UK Equity Income

7.7

-4.5

BlackRock World Mining Trust (LSE:BRWM)

Commodities & Natural Resources

7.3

-4.6

European Assets (LSE:EAT)

European Smaller Companies

7.0

-9.5

Aberforth Split Level Income (LSE:ASIT)

UK Smaller Companies

6.9

-7.0

Henderson High Income (LSE:HHI)

UK Equity & Bond Income

6.6

-7.0

CT Global Managed Portfolio Income (LSE:CMPI)

Flexible Investment

6.5

-0.4

JPMorgan China Growth & Income (LSE:JCGI)

China / Greater China

6.5

-9.2

CT UK High Income (LSE:CHI)

UK Equity Income

6.4

-2.7

Shires Income (LSE:SHRS)

UK Equity Income

6.4

-8.9

UIL (LSE:UTL)

Flexible Investment

6.2

-34.5

Lindsell Train (LSE:LTI)

Global

6.0

-17.2

JPMorgan Global Core Real Assets (LSE:JARA)

Flexible Investment

5.8

-23.8

Premier Miton Global Renewables Trust (LSE:PMGR)

Infrastructure Securities

5.8

-9.7

abrdn Asian Income Fund (LSE:AAIF)

Asia Pacific Equity Income

5.3

-12.7

Lowland Ord (LSE:LWI)

UK Equity Income

5.2

-8.6

BlackRock Latin American (LSE:BRLA)

Latin America

5.2

-8.2

Middlefield Canadian Income (LSE:MCT)

North America

5.2

-12.9

Athelney Trust (LSE:ATY)

UK Smaller Companies

5.2

-13.4

JPMorgan Claverhouse (LSE:JCH)

UK Equity Income

5.2

-5.7

Schroder Income Growth Fund (LSE:SCF)

UK Equity Income

5.1

-8.6

Merchants Trust (LSE:MRCH)

UK Equity Income

5.1

0.7

City of London (LSE:CTY)

UK Equity Income

5.0

0.1

Invesco Asia (LSE:IAT)

Asia Pacific Equity Income

5.0

-11.4

Ecofin Global Utilities & Infrastructured (LSE:EGL)

Infrastructure Securities

5.0

-14.2

Source: Association of Investment Companies and Morningstar. Data to 12 January 2024). Includes investment trusts in equity sectors and in the Flexible Investment sector. Excludes VCTs and alternatives. Excludes investment trusts where wind-up or restructuring plans have been proposed.

The key things to size up with these high yields 

There are a few things to bear in mind when considering these high-yielding options. First, investment trusts tend to be more volatile than funds over shorter time periods due to discounts potentially widening and the ability to gear (borrow to invest), so make sure you are comfortable with that.

Second, consider the strength of the dividend reserves, which enables investment trusts to bolster dividend payouts in leaner years. The revenue reserve figure, expressed in years, is published on the Association of Investment Companies (AIC) website.

A third consideration is that some trusts pay 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. Therefore, investors need to be aware that in years when the NAV on these trusts falls, the total dividend paid and the prospective yield in the following year are also likely to decline. 

How income is generated from the underlying investments is also important. Some investment trusts finance their dividends from capital as well as income. This approach is all well and good when capital returns are being delivered, but it tends to be more erratic when stock markets are more volatile. 

Another thing to remember is that high yields do not mean market-beating returns from a total return perspective, when both capital and income are combined.

In addition, dividend growth may be higher for trusts with lower yields today. 

Finally, while there are no excessive premiums in the above table, there are some modest premiums. As a result, investors buying today are paying more than the underlying assets are worth. In general, investors should be cautious when a premium is 5% or higher since premiums do not tend to be sustainable over time.

High-yielding trust picks from one analyst

Peel Hunt, the analyst, favours high-yielding trusts investing in alternative assets. Of its picks for income in 2024 that are yielding 5%-plus, it highlights Tufton Oceanic Assets (LSE:SHIP), Sequoia Economic Infrastructure (LSE:SEQI), BioPharma Credit (LSE:BPCR), Greencoat UK Wind (LSE:UKW), BBGI Global Infrastructure (LSE:BBGI) and Cordiant Digital Infrastructure (LSE:CORD). The respective yields are 9.4%, 7.8%, 7.4%, 6.8%, 6.3%, and 5.4%.

It said: “Our top picks offer one or more of the following characteristics within an attractive total return profile: a competitive or above-average yield, fully covered dividends, dividend growth, robust underlying cash flow profile, and balance-sheet quality.”

Peel Hunt’s other income picks, with yields ranging between 2.8% and 4%, are: CC Japan Income & Growth (LSE:CCJI), JPMorgan Global Growth & Income (LSE:JGGI), BlackRock Frontiers (LSE:BRFI) and Law Debenture Corporation (LSE:LWDB).

It added: “We continue to place emphasis on companies that have delivered on inflation feedthrough, translating the higher inflation backdrop into meaningful dividend growth. The average dividend yield on offer across our top picks is circa 5.7%.”

Rival analyst Winterflood has also published its own list of investment trust tips for 2024.

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