Ian Cowie: 10 high-yielding trusts keeping pace with inflation

Our columnist examines the investment trusts yielding at least 4.7% that have grown their dividends over the past five years at least in line with inflation. 

Where can income-seeking investors find decent dividend yields of at least 4.7%, rising in line with inflation - or ahead of it - and whose payouts have been sustained without fail for at least five years?

New exclusive research for interactive investor by the Association of Investment Companies (AIC) has identified 10 investment trusts that currently yield 4.7% dividend income or more, which beats the best bank or building society five-year fixed rate currently available, and they also achieved average annual dividend growth of at least 3.9% over the past five years.

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The latter criterion was chosen because the official rate of inflation, the consumer prices index (CPI), averaged 3.9% over the same five-year period, plus these investment trusts have not cut or reduced payouts at all during that period.

Top of the table for initial income stands the appropriately named Apax Global Alpha (LSE:APAX) yielding 6.85%. Payouts have risen by an annual average of 8.82% over the last five years, according to independent statisticians Morningstar. This £1.25 billion investment trust in the AIC’s ‘Private Equity’ sector allocates assets across four sectors, which it describes as “Tech & digital; services; healthcare; and internet/consumer”. The individuals responsible at Apax Guernsey Managers prefer not to disclose their identities, which might be taking ‘private’ a bit too far for this ‘equity’ investor. 

Second, for initial income, stands Impact Healthcare REIT (LSE:IHR). It currently yields 6.64%, having increased shareholders’ income by an annual average of 3.91% over the last five years.

This £409 million investment trust is in the AIC ‘Property - UK Healthcare’ sector. Fund managers Andrew Cowley and Mahesh Patel say the aim is: “to acquire, own, lease, renovate, extend and redevelop high-quality healthcare real estate assets in the UK, in particular care homes, and to lease those assets to care home operators and other healthcare service providers, under full repairing and insuring leases.”

Baby boomers - like me - aren’t getting any younger, so care homes look like a growth sector, and IHR offers investors a sustainable income for helping to capitalise a socially necessary service.

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Ranking third is abrdn Equity Income Trust (LSE:AEI), currently yielding 6.3% after dividends increased by an annual average of 5.83% over the last five years. AEI’s underlying holdings are led by the oil giants BP (LSE:BP.) and Shell (LSE:SHEL), with the banks Barclays (LSE:BARC) and NatWest (LSE:NWG) also among the top 10.

More controversially - but profitably - the coal company, Thungela (LSE:TGA), also features in this stalwart of the AIC ‘UK Equity Income’ sector. AEI’s fund manager Thomas Moore explained: “Our investment process seeks to identify under-appreciated stocks that are set to benefit from positive changes in their corporate fundamentals. Investors can be irrational, especially during periods of macroeconomic disruption.”

The same sector also produces the fourth-highest initial income, with Chelverton UK Dividend Trust (LSE:SDV) yielding 6.28%, rising by an annual average of 6.71%. Interesting assets include the Belvoir Group (LSE:BLV), the franchised estate agency operator, and M P Evans Group (LSE:MPE), the sustainable Indonesian palm oil producer.

However, it is important to beware that SDV is a split-capital investment trust. This corporate structure has a historic tendency to create conflicts of interest between different classes of shareholders.

Montanaro UK Smaller Companies (LSE:MTU) ranks fifth with an initial yield of 5.5%, rising by an eye-stretching annual average of 25%. Top 10 underlying holdings include 4imprint Group (LSE:FOUR), the marketing goods group; the cult toymaker Games Workshop (LSE:GAW); and the ship broker Clarkson (LSE:CKN).

CT Global Managed Portfolio Income (LSE:CMPI) stands sixth with initial income of 5.28%, rising by just over 4%. CMPI is a fund of other investment trusts, managed by the well-regarded Peter Hewitt of Columbia Threadneedle. Top 10 holdings currently include Law Debenture Corporation (LSE:LWDB), City of London (LSE:CTY) and Greencoat UK Wind (LSE:UKW).

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Lindsell Train (LSE:LTI) stands seventh with 5.1% initial income, soaring by an extraordinary annual average of 42%. Equally unusual is this ‘global’ investment trust’s 40% asset allocation to its own fund management company’s shares. This might be too much concentration of risk for some folk.

Lowland (LSE:LWI) is eighth with 4.9% income, growing by 4.5%. This ‘plain vanilla’ option in the ‘UK Equity Income’ sector includes the usual oil giants, Shell and BP, plus the banks HSBC Holdings (LSE:HSBA) and NatWest.

JPMorgan Claverhouse (LSE:JCH), ranking ninth, is the only trust in this top 10 that has the remarkable record of raising dividends every year for the last half century, without fail. It currently pays 4.8% income, rising by an annual average of 4.9%.

Like LWI, this is another 'UK Equity Income' trust with both the oil giants mentioned above also found here. Other top holdings include the Anglo-Swedish pharmaceutical giant AstraZeneca (LSE:AZN), and British American Tobacco (LSE:BATS), which might seem an odd couple to some.

CT Private Equity (LSE:CTPE) ends our sustainable income list as it began, with underlying holdings largely outside public stock markets, although its top 10 does include Ashtead Group (LSE:AHT), the FTSE 100-listed industrial equipment group. CTPE yields 4.76% rising by a brisk 9.7%.

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Nick Britton, head of intermediary communications at the AIC, told me: “Recent years have been challenging for income investors, with the Covid pandemic, soaring inflation and the war in Ukraine creating volatile and difficult market conditions.

“However, many investment companies have been able to hold or even increase their dividends by making use of revenue reserves they had put aside in easier times.

“Dividends are never guaranteed, but many investment companies have long track records of growing payouts to shareholders as well as growing their capital invested over the long term – a reassuring thought as we all battle with soaring prices.”

That raises the important point that each investor should carefully consider her or his own individual priorities when it comes to balancing their requirement for income or growth or a mixture of both. The price of a high yield today can be low total returns tomorrow.

But the fact remains that investment trust shareholders enjoy unique advantages over other forms of pooled funds to sustain rising payouts over long periods of time. That can prove crucial, post ‘pensions freedom’, now that rising numbers of us will rely on investment income to pay for retirement.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.