The fund and investment trust sectors with the highest yields

Fight back against inflation and low savings rates with these fund and trust ideas. 

Dividends are back in fashion as inflation and rising interest rates drain the life out of fast-growing stocks.

Being able to fall back on payments from companies to bolster investment returns or boost bank balances as the cost of living rises has rarely been so important – but picking the right investment sector for the largest dividends is no easy task.

We look at the top-yielding investment trust and open-ended fund sectors and analyse whether market-leading yields are too good to be true.

Investment trusts

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.

Honeycomb Investment Trust yields the most, 7.8%, followed by BioPharma Credit and VPC Specialty Lending Investments, with yields around 7%.  

But Dzmitry Lipski, head of funds research at interactive investor, said that this “specialist” investment sector was only for seasoned investors who understand the building blocks of a private debt portfolio.

He said: “The golden rule is to not invest in what you don’t understand. This sector may not be as risky as it seems and the high income may be delivered, but it is a complicated investment area that should be approached with caution.”

Real assets, such as property and infrastructure, also provide high yields. Healthcare property trust Target Healthcare REIT has a 6% yield, commercial property trust AEW UK REIT yields 6.7% and Schroder European Real Estate Investment Trust yields a whooping 7.9%. Infrastructure trust HICL Infrastructure yields 5.4%.

Renewable energy infrastructure trusts just missed out on the top 10, yielding 4.8% as a sector. This includes Greencoat UK Wind (5.5%) and US Solar Fund (6.6%).

Real assets are loved by investors for their dependable earnings and dividends. Their income cam also be linked to inflation via government or commercial contracts.

Lipski said: “They have a low correlation to equity markets and dividends are reliable. However, investors should not over-invest in real assets, keeping a maximum of 10% of their portfolio in the sector.”

But renewable energy trusts may be vulnerable to tax rises, although they were spared from the windfall tax.

Another problem with “real asset” trusts is that they often trade at high premiums to the value of their underlying assets. This means that they are vulnerable to sharp drops in share prices if sentiment turns against them. The complexity of buying physical assets also means that investment fees and management fees can be higher than trusts that buy shares.  

Within equities, UK trusts are the highest yielding. UK Equity Income yields 4.55% on average, while the global equity income sector yields 3.45%. Global emerging markets yields 2.36% and global yields 1.97%.

Source: Morningstar, 25 May 2022. Past performance is not a guide to future performance.

Open-ended funds

Open-ended funds are not well suited to owning illiquid or “real” assets, unlike investment trusts. They offer daily dealing in their assets, meaning they must buy and sell investments as money is added or withdrawn from a fund. On the other hand, trusts list their shares on the stock market, which allows for the share price and underlying investment value to diverge.

This means open-ended funds are largely limited to public stock and bond markets, which means they cannot tap into higher-yielding – but tougher to invest in – parts of the world, such as infrastructure or private debt.

The highest yielding sector is UK Equity Income, at 3.9% on average. The British stock market is home to many high-yielding stocks, including those in the mining, energy and banking sectors. This makes it the top market in the world for taking a dividend income from shares. Global equity income funds yield less, at 2.4% on average, while UK All Companies funds yield 1.85% on average.

High yielding UK stock funds include BNY Mellon Equity Income Booster (5.84%), Fidelity Enhanced Income (5.83%), Man GLG Income Professional (5.19%) and Schroder UK-Listed Equity Income Maximiser (6.8%)

Top global funds for dividends include Fidelity Global Enhanced Income (5.25%), Morgan Stanley Global Brands Equity Income (3.96%) and Schroder Global Equity Income (3.4%).

Income “maximiser”, “booster” or “enhanced” funds pay out above-market rate income by using derivatives to pay out share price growth as income.

High-yield bonds yield 3.55% on average, according to Morningstar. High-yield bonds, also called junk bonds, invest in riskier parts of the bond market for a higher return. Some of the highest yielders are Schroder High Yield Opportunities (6%), L&G Active Global High Yield Bond (5.96%), and BNY Mellon Global High Yield Bond (5.24%).

Emerging market bond funds yield a bit less at 2.65% on average, while corporate bond funds buying only the safest debt yield 2.4%.

Lipski said “For dividend hunters, the UK market is providing extremely attractive opportunities relative to the rest of the world. As market sentiment shifts from preferring fast-growing stocks to mature ones providing tangible returns via dividends, there is plenty of scope for capital gains as well.”

Source: Morningstar, 25 May 2022. Past performance is not a guide to future performance.