24th May 2016
Investment bank and broker Stifel says there are 19 trusts investing in equities which have a historical dividend yield in excess of 4%. In a note issued this week, it says that for those prepared to take equity risk, these may be attractive in this low interest rate environment.
Highest yielders: The rise in equity markets and fund share prices since the low point in February has meant that dividend yields have fallen more recently. In January 2016, there were 21 trusts (with market caps in excess of £80m) investing in equities which had a yield of 4.0% or higher. Today, this number has fallen back to 19, but the list does include a number of interesting equity funds that have good long-term track records of dividend growth. For investors prepared to take equity risk, these may be attractive for income seekers at a time of exceptionally low interest rates. In non-equity sectors (excluded from this list published), the property, infrastructure, renewable energy and debt fund sectors also continue to offer attractive yields.
UK equity funds: The list of high yielding funds continues to include a number of funds investing primarily in UK equities. City of London Trust, managed by Job Curtis, has a yield of 4.2% and a good long-term track record with a 50-year record of annual dividend increases. Merchants has a yield of 6.1%, with the shares on a 5% discount (NAV ex-income). This is close to its widest discount level over the past year of 7% (range 7% disc. to 5% prem.). The portfolio focus is on FTSE 100 companies and the trust typically has c.20-25% leverage. Schroder Income Growth, run by Sue Noffke, is paying a 4.3% yield, with the dividend fully covered by revenue earnings (EPS). It is trading on an 8% discount to NAV and has seen good outperformance in recent years. Murray Income and Dunedin Income Growth both have a historical yield of 5% or more, although over one year to 22/05/16, their NAV TRs have underperformed the FTSE All Share Index. Whilst dividend cuts cannot be ruled out in the UK equity sector in the next year, 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, which do not maintain reserves.
Asian and Emerging specialists: There has been some recovery in the performance of Asian and Emerging Markets in recent months and there are a number of funds investing in these regions offering high yields. Henderson Far East Income has a yield of 7.1%, primarily from a portfolio of equities. Aberdeen Asian Income has delivered an NAV TR of 5% over 6 months to 22/05/16 and has a yield of 5.4% and Schroder Oriental Income has a 2.1% NAV TR and 4.4% yield. JPMorgan Global Emerging Income has a yield of 5.3%, although the NAV has been weak over one year, with the NAV TR down 15%.
International Trusts: Murray International with a yield of 4.9% has had a tough couple of years in performance terms, although we note that the recent relative performance has been much better, with some of the income and value-oriented stocks in the portfolio seeing a strong recovery from the market lows in February. Over the past six months, the NAV TR has risen 10.2%, which is much better compared with many other international trusts. For example, Scottish Mortgage (1.2% yield), which has become a ‘darling’ of the market, has seen a negative 6% NAV TR over the past six months. European Assets, which invests in European mid & small caps, has a prospective yield of 6.0%, but it should be noted that this is partly financed by a return of capital.
Risk of dividend cuts: BlackRock World Mining continues to top the list of the highest yielders with a 9.4% historical yield. The final dividend to December 2015 of 14p was maintained with a total dividend of 21p for the year; however, the board did signal a cut during 2016, to reflect cuts in payouts at the underlying mining companies. By way of example, if the total dividend falls by 25%, the prospective 2016 yield on the fund declines to 7.0%.