There are 25 investment trusts investing in equities with dividend yields ranging between 4% and 7%, with one even higher, that have been recommended by analysts as ISA season ramps up.
Ahead of the ISA deadline in early April and as markets emerge from a gloomy period, many investors are casting around for suitable places to put their savings.
The high-yielding trusts, which span a wide range of sector and geographic emphases, have been flagged by analysts at broker Stifel, who said the yields are "relatively attractive" for investors prepared to take equity risk.
Most of the highlighted trusts offer exposure to overseas markets, as means of investors looking to diversify UK exposure, and the majority also have dividend reserves and a good record of delivering annual dividend growth.
The highest yielding trust was Henderson Far East Income Limited (LSE:HFEL), a £44mln market cap company yielding 8.6%, followed by abrdn Equity Income Trust PLC at 6.4%, European Assets Trust PLC and Henderson Diversified Income Trust plc (LSE:HDIV) both on 6%.
Included in the list are a number of long-established UK equity income funds, such as City of London, Merchants and JPM Claverhouse, as well several Asian investors.
The sector specialists include one focused on mining and another on biotechs.
Trusts primarily investing in equities with a dividend yield of 4% and above
- Henderson Far East Income 8.6%
- abrdn Equity Income 6.4%
- European Assets* 6.0%
- Henderson Diversified Income 6.0%
- BlackRock World Mining Trust 5.9%
- Henderson High Income Trust PLC (LSE:HHI) 5.8%
- BlackRock Latin American* 5.7%
- Invesco Perpetual UK Smaller Companies* 4.9%
- JPMorgan Claverhouse 4.7%
- Lowland Investment 4.7%
- City of London 4.7%
- Merchants Trust 4.6%
- JPMorgan Japan Small Cap Growth & Income* 4.5%
- abrdn Asian Income 4.4%
- Dunedin Income 4.3%
- The Diverse Income Trust 4.2%
- JPMorgan Asia Growth & Income* 4.2%
- Schroder Income Growth 4.1%
- Murray International 4.1%
- Murray Income 4.1%
- Montanaro UK Smaller Companies* 4.1%
- Invesco Asia* 4.0%
- Henderson International Income 4.0%
- International Biotechnology* 4.0%
- BlackRock Frontiers 4.0%
(* Eight trusts pay a fixed percentage of NAV and pay 'variable' dividends)
"One area of caution is around trusts that pay out a fixed amount of their NAV in the form of dividends," the analysts noted.
This is typically around 4% of NAV and at times when NAVs have fallen, such as for some of the trusts last year, the dividends will automatically be cut.
A number of the trusts are also 'manufacturing' yield, Stifel said, through a policy of paying these dividends, which are at a level higher than the trust receives in its revenue EPS.
Therefore, they are funding the revenue shortfall by paying out of their capital, ie NAV.
An example is Montanaro, where the UK small cap trust in the year to March 2022 generated revenue EPS of 1.7p per share, a capital return down -13.1p per share and dividend 6.4p. "Therefore, the dividend paid was only 0.27x covered by revenue earnings."
BlackRock's global mining trust, on the other hand, pays out all its income as dividends and therefore the dividend may be reduced at times when the underlying mining companies cut their dividends.
Stifel noted though that many of the trusts are established income investors and have paid dividends fully covered by revenue EPS historically and have "meaningful" revenue reserves.
"These reserves can be drawn on to maintain or increase dividends at times when there are dividend cuts at the portfolio companies in which they invest.
"These reserves can be used to smooth out dividends if necessary and we do think that, by using revenue reserves, these investment trusts should be able to deliver a more robust level of dividend than similar unit trusts and open-ended funds that do not maintain reserves."
Murray International, for example, had a revenue reserve of £63mln at the end of the previous year, equivalent to almost a full year’s annual dividend cost of around £70mln.