The Highest Yielding Equity Investment Trusts

The broker Stifel has recently analysed the top dividend paying equity investment trusts. Their research found that there are currently 25 of these vehicles paying a yield of four percent or more, which they describe as relatively attractive for those who are willing to take on the associated risk.

If you are looking for UK exposure the list includes a number of long-established options such as City of London (LON: CTY), Merchants (LON: MRCH) and

JPM Claverhouse (LON: JCH), all with yields of around 4.7%. The latter is available on a six percent discount, whereas the others are trading at a small premium.

Higher yields are available if you look overseas, especially if you are willing to invest in Asia. Henderson Far East Income (LON: HFEL) is currently paying 8.6% and trading on a four percent premium, while abrdn Equity Income (LON: AAIF) is yielding 6.4% and trading at par. There are also more defensive international options like Murray International (LON: MYI) with a 4.1% yield.

Dividend As A Fixed Percentage Of NAV

One area of caution is around trusts that pay out a fixed amount of their NAV in the form of dividends. There are actually eight of these amongst the 25 highest yielders and typically they distribute four percent of their NAV, often calculated using the trust’s year-end or quarter end figures.

Investors need to be aware that in years when the NAV on these trusts fall, the total dividend and the prospective yield in the following year are also likely to decline, with several examples of this having been seen in the recent past. The funds that use this approach are spread across different sectors, so it is important to check before investing.

Examples include: European Assets (LON: EAT), BlackRock Latin American (LON: BRLA), Invesco Perpetual UK Smaller Companies (LON: IPU), JPMorgan Japan Small Cap Growth & Income (LON: JSGI) and International Biotechnology (LON: IBT).

Some of these trusts are paying out income at a higher level than their earnings per share, so part of the dividend is uncovered. One such is Montanaro UK Smaller Companies (LON: MTU), whose latest EPS was just 1.7 pence per share compared to a dividend of 6.4p.

Revenue Reserves

Another key feature for income investors to look at is the revenue reserves, which can be substantial when a trust has acted prudently and paid dividends of less than their historical EPS. These reserves can be drawn on to maintain or increase dividends at times when there are cuts amongst the portfolio holdings, or to smooth out the income stream over time.

A good example is Murray International (LON: MYI) whose revenue reserve totalled £63m in the accounts for the year ended 31 December 2021. This was almost equivalent to a full year’s dividend of £70m and means that investors can be virtually certain that it can maintain and grow its distributions for the foreseeable future.

At the other end of the scale is a trust like BlackRock World Mining (LON: BRWM), which pays out all of its annual income as dividends. As a result, investors receive a higher yield – currently 5.9% − in the knowledge that the distributions will fluctuate from year to year and would be reduced whenever the underlying mining companies cut their pay-outs.