The Highest Yielding Equity Trusts

The sharp increase in interest rates in recent months has put pressure on the prices of many income paying securities, most notably in the alternative asset classes, but it has also had an impact in the equity markets. There are now some attractive dividend yields available from a variety of different regions.

According to the broker Stifel, there are currently 34 trusts that invest primarily in equities that have a dividend yield of four percent or higher. The last time that they looked at this area was in February when there were only 25 such vehicles, with the increase reflecting a combination of dividend growth and falling share prices.

Most of the trusts offer exposure to overseas markets rather than the UK and the majority have dividend reserves, as well as a good record of delivering annual dividend growth. Stifel believe that the yields on these funds are relatively attractive for investors who are prepared to take equity risk.

Don’t Just Look At The Headline Yield

Top of the list of high payers is Henderson Far East Income (LON: HFEL), which has an historic yield of ten percent and is trading on a three percent premium. Another of its peer group, abrdn Asian Income (LON: AAIF), pays a more modest income of 5.1%, but is available on a 13% discount and has a five-year share price total return of 25% versus a loss of four percent.

For those looking closer to home there are a number of long-established UK equity income portfolios that are paying more than four percent at the moment. These include: Merchants (LON: MRCH), JPM Claverhouse (LON: JCH) and City of London (LON: CTY) with yields of 5.2%, 5.2% and 5.1% respectively, with all of them having increased their dividends for at least the last 41 years.

One of the most important features to check is the level of dividend reserves, which build up over time where trusts have paid dividends that are fully covered by revenue EPS. These reserves can be used to maintain or increase dividends when the companies in the portfolio make cuts.

A prime example is JPMorgan Claverhouse, whose revenue reserve totalled £22.9m at the end of December, which was equivalent to just over one year’s annual dividend of £19.2m. This obviously puts it in a strong position to be able to maintain its income even in tougher economic conditions.

Warning Signs

Trusts that don’t have revenue reserves like BlackRock World Mining (LON: BRWM) are much more vulnerable. It currently has a high yield of 6.6%, but pays out all its income as dividends, which means that the income is more variable and will be reduced when the underlying mining companies cut their distributions.

Another area to be aware of is those trusts that pay out a fixed amount of their NAV in the form of dividends. This is typically around four percent and at times when NAVs fall, the dividends will automatically be cut.

There are ten such trusts that have made it onto the list of highest yielders with the examples including: BlackRock Latin American (LON: BRLA), International Biotechnology (LON: IBT) and Montanaro UK Smaller Companies (LON: MTU).

Stifel believe that some of these funds are also ‘manufacturing’ yield through this process, because a few of them are paying dividends that are at a level higher than the trust receives in its revenue EPS. They are therefore funding the revenue shortfall out of their capital.