I noted in this column last week that the universe of options had been shrinking for income investors thanks to frenzied consolidation in the investment trust space. That’s especially the case for alternative assets, where trusts continue to grapple with big discounts and face something of an existential crisis. But there are still many options out there offering share price dividend yields north of 10 per cent for those who are happy to take something of a risk.
The level of choice on offer is much less generous for those backing equity trusts, however. Henderson Far East Income (HFEL) is a perennial standout here with a yield of nearly 11 per cent, and its shares have made some very healthy returns in the past year.
But it is something of an anomaly here: conventional equity trusts with bumper yields are otherwise a rare sight. To touch on the exceptions, Chelverton UK Dividend (SDV), a tiny UK income fund, has a yield of almost 9 per cent. Asia and the UK continue to stand out if we move further down the income scale, with Abrdn Asian Income (AAIF) on 7.1 per cent and Abrdn Equity Income (AEI) on 6.9 per cent.
Otherwise we have a smattering of different trusts with chunky yields: European Assets (EAT), which focuses on small and mid-cap shares and pays a dividend from a combination of income and capital, has a yield of 6.5 per cent. Lindsell Train (LTI) is on 6 per cent, with CT UK High Income (CHI), Athelney (ATY) and Merchants (MRCH) on more than 5 per cent.
Apart from a couple of specialist names, these are the only equity trusts that offer yields in excess 5 per cent. That suggests that fans of equity income in a trust format need to exercise some patience – or vote with their feet, given there are plenty of other options in other asset classes. The UK 10-year government bond currently trades on a yield of 4.5 per cent, offering a ‘safe’ way to lock in such gains, while a FTSE 100 tracker has a trailing yield of 3.5 per cent, and open-ended equity income funds are required to pay out all the dividends they receive.
As such, this latter group could end up paying you more than the closed-ended equivalent. That’s something to weigh up against the fact that many trusts still trade on big discounts, and put some revenue reserves aside for times when the dividends in the market might dry up. We saw that most clearly in 2020, when many UK-listed companies canned their payouts but trusts were able to keep the show on the road.
Then there is the fact that many trusts are good at increasing their dividends over time, and the AIC’s well-known ‘dividend heroes’ list of those with at least 20 consecutive annual dividend increases is dominated by equity focused vehicles. Seven of these are UK income trusts, with three UK small-cap funds also in the list. That bodes well for those who want to very gradually increase how much they receive in a bid to fight off inflation.
Whatever your stance, competition for inclusion in an income portfolio remains fierce, and investors do at least have a choice of high yielders, ‘safe’ income and options, such as equity trusts, that might grow both their capital and income over time. But it pays to be selective.
