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Top Investment Trusts for Income

Investing in trusts can pay dividends - but make sure the pay-out is sustainable

Holly Black 14 May, 2019 | 3:23PM

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Income-seekers should consider investments trusts for decent dividends – some 31 equity trusts are yielding 4% or more, according to research by Stifel.

Depending on the level of risk investors are willing to take, they could pocket a yield of up to 6.3%. The three-star rated Henderson Far East Income (HFEL) has the highest dividend on offer, according to Stifel. The trust, managed by Mike Kerley, invests in equities across China, Australia and Singapore. Top holdings include computer chip maker Taiwan Semiconductor and real estate developer China Vanke.

But income isn’t the only factor to consider; the performance of the trust has lagged its peer group. It has returned 50.5% over five years compared to a sector average of 70.5%. Despite that, the trust trades at a 2% premium to its net asset value.

Investors may not consider commodities companies as a typical hunting group for dividends, but BlackRock Commodities Income (BERI) (recently renamed to BlackRock Energy and Resources) and BlackRock World Mining (BRWM) are both among the top five dividend payers, yielding 5.6% and 5.5% respectively. World Mining has a two-star rating but a Neutral rating from Morningstar analysts. It invests in big mining companies including BHP (BHP), Rio Tinto (RIO) and Vale (VALE3). Over five years the trust, which trades at a 10% discount to net asset value, is down 5.7% while the average Commodities & Natural Resources fund is down 23.9% over that period. The trust cut its dividend is 2016 from 21p to 13p but increased the pay-out in 2017 and 2018.

The number of trusts yielding at least 4% has increased rom just 21 in August 2018, and from 28 in February. Stifel says the rising yields reflects falling share prices as well as dividend growth. Murray International (MYI), for example, grew its dividend by 3% in 2018 while its share price dropped 5.5%. It currently yields 4.6%.

But high yields are not the only thing that income-seekers should pay attention to. Arguably, a fund that can grow its dividend year after year will produce a better income than one that has an unsustainably high yield. The same is true of dividend-paying stocks. This week Vodafone, whose shares had been yielding close to 10%, disappointed investors when it slashed its dividend by 40%.

Matthew Jennings, investment director at Fidelity, says: “It’s not just about choosing the companies with the highest yields, because that is often an indication the dividend could be cut because of some weakness in the business. If you look at the yield without doing the research, you have no way of understanding whether it will be delivered or not.”

Also among the top-yielding trusts is City of London (CTY), which yields 4.5% and is a so-called dividend hero, which has increased its payout for 52 years in a row. Another featured in the list is the Silver-rated Lowland Investment Company (LWI), which yields 4.1%. Run by James Henderson and Laura Foll, the trust takes a value approach investing in UK firms including HSBC (HSBA), Severn Trent (SVT) and BP (BP.). The Silver-rated Edinburgh Investment Trust (EDIN), which has increased its dividend for 13 consecutive years, is also among the top income-paying trusts, with a yield of 4.6%.

Stifel says: “For those investors prepared to take equity risk, the yields on these funds may be attractive in the current low interest rate environment. Many of these funds also have substantial dividend reserves and a good record of delivering annual dividend growth.”

 Stifel dividends

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BlackRock Energy and Resources Income72.70 GBX0.55
BlackRock World Mining Trust plc359.00 GBX-0.28
BP PLC521.00 GBX0.79
Commercial International Bank (Egypt) SAE GDR4.30 EUR-0.22
Edinburgh Investment Ord591.00 GBX0.68
Henderson Far East Income Ord365.00 GBX-0.27
HSBC Holdings PLC615.60 GBX-0.06
Lowland Ord1,285.00 GBX-0.39
Murray International Ord1,200.00 GBX-0.17
Rio Tinto PLC4,233.00 GBX-0.39
Severn Trent PLC2,068.00 GBX-0.91

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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