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3 Investment Trusts for Inflation-Busting Income

Investment trusts are fertile hunting ground for investors seeking above-inflation yields. This trio fit the bill and are highly rated by Morningstar analysts

David Brenchley 24 October, 2017 | 3:21PM

Lloyds is  widely held by income trusts

A further spike in UK inflation saw the consumer prices index (CPI) hit 3% in September for the first time in five years. Inflation has now been above the Bank of England’s target rate of 2% since February.

While interest rates are likely to rise in November, and potentially again in 2018, increases will be gradual and come from an historic low level of 0.25%. As a result, savers are increasingly being pushed towards the stock market to maximise returns.

Investment trusts are a fertile hunting ground as their structure enables them to hold cash reserves in order to boost dividend payments in the bad times as well as good.

Twenty investment trusts on the market have grown their dividends for an impressive 20 years or more, with three racking up half a century or more of pay-out increases.

There are 13 sectors that yield above the current rate of inflation, according to the Association of Investment Companies (AIC). The list is led by three specialist sectors: Leasing; Debt; and Infrastructure – Renewable Energy. They yield 6.9%, 6.55% and 5.75% respectively.

Three property-related sectors feature, with many trusts here having the advantage of inflation-linked rental incomes.

However, many of the highest-yielding sectors can be risky for investors, chiefly due to ta lack of understanding of what these trusts invest in. Debt products, in particular, can be complex and difficult to grasp even for seasoned investors.

“Investors should not buy on the basis of the headline yield alone,” cautions Annabel Brodie-Smith, communications director of the AIC. “There’s a broad spectrum of risk and reward, so it’s crucial that investors do their homework.”

Two familiar sectors with high yields are Global Equity Income and UK Equity Income, paying 3.7% and 3.6% respectively.

For those looking for inflation-beating dividends, we highlight three investment trusts that yield above 3.5% and are highly rated by Morningstar analysts.

City of London (CTY)

Gold rated City of London has increased its dividend in each of the past 51 years and Morningstar analyst David Holder expects this to continue. The £1.5 billion trust yields 4% and its 2016 pay-out of 15.9p per share was covered 1.09 times by earnings with 13.5p per share held in reserve.

Henderson’s Job Curtis has been in charge for 25 years and investors have been well served by his prudent and measured approach. Almost half the trust’s portfolio is invested in financials or consumer goods companies, with Lloyds (LLOY), HSBC (HSBA) and Unilever (ULVR) in the top 10 holdings.

Murray International (MYI)

For those not wanting to be tied down to a UK market with a concentration of high yielders, the £1.65 billion Murray International could fit the bill. It currently yields 3.79% and is Gold Rated.

Headed up by Aberdeen’s Bruce Stout, Holder says Murray’s value-based approach has not deviated during tough years and that investors are likely to be rewarded for their patience over the longer term.

Most of the fund’s portfolio is invested in emerging markets, with chip maker Taiwan Semiconductor, Mexican airport operator ASUR and Chilean chemicals firm SQM the three top holdings.

Edinburgh (EDIN)

Mark Barnett took over the management of the Silver rated Edinburgh Investment Trust from Neil Woodford in January 2014. The £1.4 billion offering also has a five-star performance rating and yields 3.56%.

Morningstar analyst Peter Brunt says Edinburgh is the most sensible way to gain access to Barnett’s skills due to its competitive fee structure and sensible liquidity restrictions on investments.

Edinburgh’s portfolio is skewed towards financials, with more than a third there. Top holdings include cigarette maker British American Tobacco (BATS), oil major BP (BP.) and defence specialist BAE Systems (BA.).

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
BAE Systems PLC535.50 GBX-1.20
BP PLC493.10 GBX0.40
British American Tobacco PLC4,983.50 GBX0.58
City of London Ord423.60 GBX-0.07
Edinburgh Investment Ord688.00 GBX0.07
HSBC Holdings PLC731.60 GBX-0.11
Lloyds Banking Group PLC65.99 GBX-0.11
Murray International Ord1,248.00 GBX-0.56
Unilever PLC4,150.00 GBX-1.71
About Author

David Brenchley  is a Reporter for Morningstar.co.uk