Income investment trusts yielding above 4% and beating inflation

For income-seeking investors, the ideal scenario is to find a fund with a high yield that delivers inflation-beating dividend growth and produces positive total returns (capital growth and income returns combined).

However, ticking all three boxes is hard to consistently achieve, which is reflected in research carried out for interactive investor by QuotedData.

The analyst screened the investment trust universe to find which income-focused strategies provided real year-on-year dividend growth (ahead of the rate of inflation which averaged 6% in 2023), while also having a yield in excess of 4%, and producing positive total returns. All figures are to the end of 2023.

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Just 11 (or 10 as CVC Income & Growth appears twice) investment trusts passed the three tests, and they are named in the table below.

When relaxing the criteria by removing the requirement to produce positive total returns, an additional 11 succeeded in yielding 4% or more while also growing their dividend. 

Andrew Courtney, an analyst at QuotedData, points out that most of the investment trusts that passed the three tests are specialist income funds. This is reflected in five investment trusts focusing on debt making the grade.

Courtney says: “The bulk of the trusts from the screen were specialist income funds, which have benefited from credit market dislocations created by higher rates of volatility. Conditions over 2023 were particularly attractive for companies with flexible mandates, such as CVC Income & Growth, that were able to rebalance allocations as opportunities presented themselves.”

Source: QuotedData. *In 2023. **For 2023 versus 2022. Past performance is not a guide to future performance.

Courtney adds that while Greencoat UK Wind was the only renewable energy infrastructure trust to make the table, if the requirement to produce total returns in 2023 was removed, there would be seven other trusts from the sector. He points out that from a yield perspective many trusts are yielding around the 7% to 8% mark, while at the same time offering payout growth well ahead of inflation.

However, investors continue to shun the sector. While the yields are higher, investors have been focusing on lower-risk areas where yields have risen. For example, cash-like money market funds are offering yields of around 5%.

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Courtney argues that the renewable energy infrastructure sector is in bargain-basement territory, with discounts around the -30% mark.

He says: “It is difficult to understand how such extreme levels can be justified, particularly for companies such as Aquila European Renewables (LSE:AERI) and Downing Renewables & Infrastructure (LSE:DORE), both of which have highly diversified portfolios that continued to generate impressive fundamental returns.”

Alongside that duo, the other five trusts from the sector that passed two of the three tests were Greencoat Renewables (LSE:GRP), Foresight Solar (LSE:FSFL), Gore Street Energy Storage Fund (LSE:GSF), VH Global Sustainable Energy Opportunities (LSE:GSEO) and SDCL Energy Efficiency Income (LSE:SEIT).

James Smith, manager of Premier Miton Global Renewables Trust  LSE:PMGR), also makes the case for there being plenty of value in the sector. He says: “The sector has been oversold with the market being overly fixated on interest rates. The discounts and the yields on offer mean that investors are being paid to wait for a recovery to play out. Interest rate cuts would be helpful, but even without that happening the fact that renewable energy infrastructure trusts have been growing their earnings should be enough to narrow discounts and boost share prices at these low levels.”

Smith says the fact that yields for renewable energy infrastructure trusts are a couple of percentage points higher than cash-like alternatives, such as money market funds, can make a huge difference over the long term. He adds: “For me, a fairer comparator (rather than money market funds) is inflation-linked exchange-traded funds (ETFs), due to much of the underlying revenues for renewable energy infrastructure trusts being inflation linked. When you compare the two, there’s a big difference in yield and, over the long term, it can make a huge difference.”

Key things to size up with income investment trusts

When researching income-paying investment trusts, bear in mind that some aim to deliver a high level of income by structuring the portfolio to have a dividend yield that is more than the market it is investing in. However, the risk is that sustaining a high dividend yield means total returns could be less impressive.

Meanwhile, investment trusts with lower yields tend to mix and match more between growth and income. However, the obvious trade-off is accepting a lower income.

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Also consider the strength of the dividend reserves, which enables investment trusts to bolster dividend payouts in leaner years. Revenue reserve figures, expressed in years, are published on the Association of Investment Companies (AIC) website.

Due to building up reserves, a number of investment trusts have impressive track records of growing their payouts year in, year out.  Recent data showed 20 investment trusts have increased their dividends for more than 20 years, while 33 trusts have increased payouts for between 10 to 20 years. Although, there is no guarantee that dividend increases will continue, investment trust boards want to maintain their track records for as long as possible. 

Another thing to look out for 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.