Fund Spotlight: market-beating yield and solid dividend growth

It may not be long before the easy 4-5% yields on offer from relatively low-risk, short-term fixed income are a thing of the past.

The general direction for interest rates is down. In September, the Federal Reserve enacted its first rate cut of 2025. Days prior, the European Central Bank held rates at a much lower 2%. The Bank of England held rates firm at 4%, but that followed three cuts already in 2025. Seemingly, challenges to economic growth and to labour markets are inducing an easing of rates across developed markets.

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In turn, this may motivate investors to explore ideas further afield in search of income. Another common source for income investors is UK companies paying stable dividends.

The yield on the market-cap weighted FTSE 100 index is 3.3%, while the FTSE 250 is 3.4%, and the FTSE Small-Cap 3.9%. These aren’t quite high enough to match the UK bank rate (4%) or a 10-year gilt (4.7%). While the UK has historically been a strong option for income seekers, across the board dividends are yet to recover to the levels seen pre-Covid. Computershare’s UK Dividend Monitor expects total dividends of £88 billion in 2025, some way below 2019’s £103 billion.

That might be reason to look to flexible strategies that have been able to increase payouts to investors in spite of macro developments and market trends. One such differentiated option is Diverse Income Trust Ord (LSE:DIVI), which aims to generate capital growth and an attractive and growing dividend by investing in UK equities via a multi-cap approach.

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While UK equity valuations are low versus global indices, this is even more so the case for UK small/mid-cap. DIVI’s flexibility across the market allows the managers to invest in large well-known dividend payers as well as find lesser-known opportunities within the unloved realms of smaller companies and those listed on the AIM market.

What does the fund invest in?

Diverse Income takes a multi-cap approach to the UK market, investing from AIM stocks to larger companies. Since launch in 2011, the investment trust has delivered an incrementally growing dividend to investors, and it is notable that dividend income has formed a very substantial portion of its net asset value (NAV) growth and, ultimately, shareholder returns.

The trust is managed by the hugely experienced Gervais Williams and Martin Turner of Premier Miton. Both have been at the helm since 2011, when the trust was founded.

There’s a focus on cash-generative businesses with strong balance sheets and, with few exceptions, most companies within the portfolio pay a dividend. The trust typically trades at a low price-to-earnings (p/e) valuation compared with peer funds or the FTSE All-Share and even small-cap indices.

DIVI avoids stock-level concentration, holding roughly 100 companies and around one-quarter of the portfolio within the top 10 positions. There is a strong bias towards small/mid-cap companies, where the managers have great expertise and where scope for both capital and dividend growth is typically more extreme.

DIVI holds nearly 30% of the portfolio in AIM, and more than 40% in small-cap, with the balance in mid and large-cap. AIM and small-cap together comprise around 13% of the Deutsche Numis All-Share benchmark. This is a key area of differentiation both versus benchmarks, which typically are weighted by market cap, as well as equity income peers, where a bias towards large-cap prevails.

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From a sector perspective, DIVI doesn’t shy away from concentration. Financials form over 40% of the portfolio, generating a similar portion of the portfolio’s income. However, it’s worth noting that this is diversified across (to name just a few) banks, such as Secure Trust Bank (LSE:STB); insurers, including Aviva (LSE:AV.) and Phoenix Group Holdings (LSE:PHNX); and retail/institutional brokers (Plus500 Ltd (LSE:PLUS), CMC Markets (LSE:CMCX), TP ICAP GROUP (LSE:TCAP)).

The next largest allocations are industrials (12%) and materials (10%), including construction group Galliford Try Holdings (LSE:GFRD), the trust’s top holding, and AIM-listed gold miner Pan African Resources (LSE:PAF).

How has the fund performed?

DIVI throughout its lifetime has often faced the challenge of a weakness of UK small-caps relative to larger companies, making outperformance tough given DIVI’s small-cap bias. The argument for a rebound in UK small-cap is rational but, following a few false dawns, the wait has been frustrating and recent UK political and economic news hasn’t enticed investors to the area.

Despite this unsupportive environment, following a difficult 2022-23 DIVI has achieved impressive absolute and relative performance throughout 2024 and 2025, delivering NAV and share price returns above both FTSE All-Share and small-cap benchmarks and equity income peers. While UK small-cap and AIM stocks broadly have languished, DIVI’s stock selection has clearly added value.

Source: Morningstar Market Return to 31/08/2025. Past performance is not a guide to future performance.

Why do we recommend this fund?

DIVI offers a differentiated approach to UK equity income investing. It’s a differentiated strategy and accordingly returns can diverge versus more conventional strategies on account of the substantial weighting to small-cap companies. The substantial exposure to the AIM market does provide an elevated risk that investors ought be aware of, however Williams and Turner are not investing in speculative, unprofitable small-caps but cash-generative firms with potential for sustainable dividend growth.

The discount, of -9.3% is deep versus its five-year average of -4.9%, or its average since inception of -1.7%. A voluntary redemption facility that allows investors to tender their shares at regular intervals has, in the past financial year, been used vociferously as investors tendered nearly 30% of shares – perhaps a strange phenomenon given the strong recent performance.

Nonetheless, the facility provides a method of avoiding runaway discounts – although it can come at the expense of the trust’s scale, which now stands at £242 million. A small size such as this can pose challenges of higher fees and the potential for less demand for shares from institutional buyers.

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Overall, DIVI has succeeded in offering investors an attractive and growing dividend (currently a 4.4% yield) and has the added benefit of being able to take advantage of its trust structure to pay dividends from an ample revenue reserve should portfolio income fall short, as was the case in 2020 when dividends across the UK market faltered.

The yearly ongoing charge of 1.13% is high, but the differentiated exposure and expertise of the management team undoubtedly make this trust a unique opportunity in the realm of equity income investing.

This fund can be found on ii’s Super 60 list of investment ideas. The latest factsheet can be viewed here.