A recent research report by Stifel has identified 25 equity investment trusts with yields in excess of four percent per annum. These are attractive levels of income, despite the recent increases in interest rates, especially as many of the funds have substantial revenue reserves and a good record of delivering annual dividend growth.
Investment trusts have an advantage over their open-ended counterparts in that they can set aside up to 15% of the income they receive each year in a revenue reserve to help support the distributions in more challenging times. This structure came into its own during the global financial crisis and again during the Covid-19 pandemic, when boards were able to dip into the reserves to top up income shortfalls so that they could maintain or increase their dividends.
Income seekers seem to be well aware of this feature as investment trusts account for the ten most bought income-focussed collective vehicles on the interactive investor platform since the start of the year. These include many of the highest yielding equity trusts identified by Stifel.
Top of the picks
The bestselling income-focused trust on interactive investor in the first five months of 2022 was the £1.8bn City of London (LON: CTY) that mainly invests in dividend paying stocks listed in the UK. It is yielding 4.5% with quarterly dividends and is one of the AIC’s dividend heroes notching up 55 consecutive years of dividend growth, although it has made good use of its revenue reserves to maintain the record.
Next up was the £1.5bn BlackRock World Mining (LON: BRWM), which holds a portfolio of mining and metals securities from around the globe. Its commodity-related exposure has done well during the current inflationary boom and the shares are currently yielding six percent with quarterly dividends.
If you are thinking of investing it is important to understand that the trust pays out substantially all of its income each year and doesn’t use revenue reserves to smooth out the payments. This means that the income can fluctuate from one period to the next depending on the profits generated by the mining stocks in the portfolio.
Other popular options
The third bestseller was another dividend hero, the £860m Merchants Trust (LON: MRCH), which has clocked up 39 years of dividend growth and is currently yielding 4.8% with quarterly distributions. It invests in higher yielding UK shares and uses gearing (debt) to enhance the returns with gross gearing currently standing at 13%.
Top of the income payers with a massive yield of eight percent was the £460m Henderson Far East Income (LON: HFEL) that invests in the Asia Pacific region. It is a part of the world that is well known for its fast growing dividends with the trust achieving a compound annual dividend growth rate of 5.8% over the last 15 years.
The other high yielding equity trust to make it into the top ten income-focused purchases was the £1.6bn Murray International (LON: MYI),which has a global portfolio that is currently paying an income of 4.8% per annum. Like the other featured trusts it is trading at a small premium to the underlying net asset value due to the attractiveness of the yield.