Interactive Investor

Lack of bargains among highest-yielding equity investment trusts

22nd February 2023 11:23

by Kyle Caldwell from interactive investor

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Research highlights 25 investment trusts primarily investing in shares with dividend yields of over 4%. But for bargain hunters, there’s a lack of big discounts. 

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For investors on the lookout for income ideas in the run-up to the end of the tax year, there’s plenty of choice among investment trusts.

New research by analyst Stifel highlights 25 investment companies yielding above 4%, with many offering exposure to overseas markets.

However, for bargain hunters there’s a lack of big discounts, a reflection of the increased demand for dividend strategies over the past year as investors attempted to weather the inflation storm. This is a trend that has also played out among interactive investor customers.

In contrast, investors have gone cold on growth strategies, which offer the prospect of ‘jam tomorrow’.

Five the 12 investment trusts yielding 4.6% or higher are trading on premiums. Most are trading on small premiums, ranging from 0.1% to 3.1%, and in these instances investors may well take the view that paying a bit more could be worth it for the high yields on offer.

However, higher premiums are harder to stomach. In general, investors should be cautious when a premium is 5% or higher due to the fact that over time premiums do not tend to be sustainable.

Of the 19 income strategies trading on discounts, one is trading above 10% - BlackRock Latin American(LSE:BRLA) - but only four others are close to double-digit territory. They are: JPMorgan Japan Small Cap Growth & Income (LSE:JSGI), abrdn Asian Income Fund (LSE:AAIF), Invesco Perpetual UK Smaller Companies (LSE:IPU), and JPMorgan Asia Growth & Income (LSE:JAGI).

Income-paying investment trusts have a particular attraction for investors who want a regular cash flow, because they don't have to distribute all the income generated by their assets every year.

Investment trusts can hold back up to 15% each year, which means they can build up a ‘rainy day’ reserve to bolster dividend payouts in leaner years. In contrast, open-ended funds have to return to investors all the income generated each year.

Some of the 25 trusts in the table below have meaningful dividend reserves, including City of London (LSE:CTY), Merchants Trust (LSE:MRCH), JPMorgan Claverhouse (LSE:JCH), and Murray International (LSE:MYI).

However, despite investment trusts having this income edge over funds, there are a couple of things to bear in mind.

The first thing to be comfortable with is that investment trusts tend to be more volatile than funds over shorter time periods, due to discounts potentially widening and the ability to gear (borrow to invest).

A second consideration 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 NAVs on these trusts falls, the total dividend paid and the prospective yield in the following year are also likely to decline.

The trusts paying out a fixed share of NAV are:European Assets (LSE:EAT), BlackRock Latin American (LSE:BRLA), Invesco Perpetual UK Smaller Companies (LSE:IPU), JPMorgan Japan Small Cap Growth & Income (LSE:JSGI), JPMorgan Asia Growth & Income (LSE:JAGI), Montanaro UK Smaller Companies (LSE:MTU), Invesco Asia (LSE:IAT) and International Biotechnology (LSE:IBT).

A number of these trusts are also “manufacturing” yield through a policy of paying these dividends, which are at a level higher than the revenue per share of the trust. By doing this, they are funding the revenue shortfall by paying out of their capital.

A final point to bear in mind is that while high yields offer investors the prospect of higher income today, there are no guarantees that this will result in market-beating returns from a total return perspective – when both capital and income are combined. In addition, dividend growth may be higher for trusts with lower yields today. 

Highest-yielding equity investment trusts 

Investment trustDividend yield (%)Percentage premium (+) or discount (-) 
Henderson Far East Income (LSE:HFEL)8.6+3.1
abrdn Equity Income Trust (LSE:AEI)6.4-0.9
European Assets (LSE:EAT)6.0-6.4
Henderson Diversified Income (LSE:HDIV)6.0+1.0
BlackRock World Mining Trust (LSE:BRWM)5.9+0.1
Henderson High Income (LSE:HHI)5.8-1.2
BlackRock Latin American(LSE:BRLA)5.7-10.4
Invesco Perpetual UK Smaller Companies (LSE:IPU)4.9-9.7
JPMorgan Claverhouse (LSE:JCH)4.7-6.0
Lowland (LSE:LWI)4.7-8.5
City of London (LSE:CTY)4.7+2.0
Merchants Trust (LSE:MRCH)4.6+1.2
JPMorgan Japan Small Cap Growth & Income (LSE:JSGI)4.5-9.9
abrdn Asian Income (LSE:AAIF)4.4-9.9
Dunedin Income (LSE:DIG)4.3-2.2
Diverse Income Trust (LSE:DIVI)4.2-2.7
JPMorgan Asia Growth & Income (LSE:JAGI)4.2-8.2
Schroder Income Growth (LSE:SCF)4.1-1.0
Murray International (LSE:MYI)4.1-2.5
Murray Income (LSE:MUT)4.1-6.8
Montanaro UK Smaller Companies (LSE:MTU)4.1-4.1
Invesco Asia (LSE:IAT)4.0-7.9
Henderson International Income (LSE:HINT)4.0-3.9
International Biotechnology (LSE:IBT)4.0-5.9
BlackRock Frontiers (LSE:BRFI)4.0-3.9

Source: Stifel and Datastream. Data as at the close on 17 February 2023. Research excludes trusts with market caps below £100 million for liquidity reasons.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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