Ian Cowie: four inflation-beating trusts yielding 4.5% or more

The price of a high yield today could be low total returns tomorrow, our columnist points out. 

Income-seeking investors who require inflation-busting yields today from investment trusts that have delivered at least a decade of dividend increases every year should consider new research, exclusively commissioned by interactive investor.

Ten investment companies have ‘done the double’, according to analysis by the Association of Investment Companies (AIC) based on data from Morningstar.

But only four of those investment companies currently yield three times or more the current 1.5% annual rate of increase in the retail prices index (RPI). Those are the ones I want to focus on today.

This research may be most useful to people aiming to live off the income from their investments or run their own retirement funds, such as your humble correspondent. However, as the long-term owner of shares in one of the ‘fabulous four’ inflation-busting investment companies paying 4.5% or more, I had better warn here and now that the price of a high yield today can be low total returns tomorrow.

Last month, I looked at AIC ‘Dividend Heroes’ that had done the double for two decades or more and this new research casts the net wider to identify increased choice for yield-seekers. Let’s get into it.

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Top of the pops ranked by income today is relatively little-known CQS New City High Yield (LSE:NCYF). It pays 8.1% income - or just over quintuple the current rate of RPI -  after raising dividends for 12 consecutive years. This trust, which sits in the AIC’s Debt - Loans & Bonds sector, has total assets of £263 million and trades at a premium of 6% to net asset value (NAV) after delivering total returns over the last one, five and 10-year periods of 28%, 40% and 76% respectively.

The somewhat tepid medium to long-term returns are compounded by an average annual rate of increase in dividends during the last five years of just 0.7%.

Second is Henderson Far East Income (LSE:HFEL), yielding an eye-popping 7.1% income after another dozen years of consistent pay rises for shareholders, averaging 3.7% per annum over the last five years. This Asia Pacific Equity Income sector trust has total assets of £495 million and trades at a modest 1.8% premium to NAV.

That apparently attractive pricing is explained by consistently disappointing total returns of 8.4%, 56% and 86%. These are the worst in its sector over all three standard periods mentioned earlier, despite HFEL’s underlying portfolio being led by solid stocks such as technology giant, Samsung Electronics (LSE:SMSN); the mega-miners Rio Tinto (LSE:RIO) and BHP (LSE:BHP) and the self-descriptive, Taiwan Semiconductor Manufacturing (NYSE:TSM). This HFEL shareholder is still dithering about what to do, but hopes to report a decision soon.

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Third is Murray International (LSE:MYI), yielding 4.5% in the Global Equity Income sector after 16 years of consecutive dividend hikes, averaging 3.2% over the last five years. This £1.7 billion giant trades at a modest premium of 1.6% after delivering total returns of 24%, 62% and 94%.

TSM and SMSN both feature in its top 10 assets but so do the cancer companies British American Tobacco (LSE:BATS) and Philip Morris (NYSE:PM), which are taboo turn-offs for this reformed smoker. However, as the terrible twosome account for less than 5% of MYI’s assets, perhaps I should just hold my nose and light up.

Fourth is JPMorgan Elect Managed Income (LSE:JPEI), yielding 4.5% in the UK Equity Income sector after 10 years of pay rises for shareholders, averaging 4.3% over the last five years. This relative tiddler with total assets of £90 million is the only one of our ‘fabulous four’ to trade below its NAV, currently offering a discount of 3%, after generating total returns of 26%, 35% and 100%. Once again, BATS is fag ash in the ointment with JPEI’s other top 10 holdings including deeply out-of-favour oil giant Royal Dutch Shell (LSE:RDSB), plus the usual suspects BHP and RIO.

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For completeness, investors willing to accept a lower initial income from trusts with at least a decade of consecutive dividend hikes under their belt, may wish to also consider Chelverton UK Dividend Trust (LSE:SDV), yielding 4.4%; International Public Partnerships (LSE:INPP), also yielding 4.4%; Lowland (LSE:LWI), yielding 4.3%; Dunedin Income Growth (LSE:DIG), yielding 4%; Aberdeen Asian Income (LSE:AAIF), also yielding 4%; and Athelney (LSE:ATY), yielding 3.9%.

For the avoidance of doubt, it is important for investors to beware that dividends can be cut or cancelled without notice and are not guaranteed. More than half of all FTSE 100 companies cut or cancelled shareholders’ income last year, but only a minority of investment companies did so, due to their unique ability to smooth dividend distributions.

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

Ian Cowie is a shareholder in BHP (BHP), Henderson Far East Income (HFEL) and Royal Dutch Shell (RDSB) as part of a globally diversified portfolio of investment trusts and other shares.