The UK investment trusts yielding more than 4.5% (and growing dividends)

The Bank of England has made its first cut to interest rates for more than four years, which has a direct impact on the income savers will receive on cash. And the lower-than-expected jump in UK inflation reported on 14 August only boosted market expectations that the Bank of England could deliver another rate cut next month.

As the rate environment turns, those who want to grow the income their money generates may want to shift out of cash and money market funds and into the financial markets and, in particular, stocks and shares which offer the potential for both yield and capital appreciation. Dividend paying shares offer a generous income today, but with the added kicker of potential growth in that income stream into the future, although of course dividends are not guaranteed.

But investment trusts can be a good option for those wanting a steady income stream and some potential capital growth. Thanks to their structure, which allows them to hold back income during good years to help sustain payments in more fallow periods, investment trusts often have enviable track records of dividend growth going back years or even decades.

Because they are invested in a diversified portfolio of dividend-paying shares, they also reduce the risks of an individual company cutting or cancelling its dividend.

The yields available from trusts in the AIC (Association of Investment Companies) Global Equity Income sector are appreciably lower than those from the UK Equity Income category. This reflects the relatively depressed valuations in the UK market, particularly compared with the US, and a stronger dividend-paying tradition and higher payout ratios (i.e. the proportion of a company’s earnings paid out in dividends) than in other geographies.

Looking at the list (below) we have included everything with an historic dividend yield of 4.5% or more and have only included trusts that have delivered growth in their dividend over the past five years. This does exclude one of the trusts with the best five-year dividend growth (of more than 11%) in Law Debenture. While the starting yield is a relatively modest 3.7%, the company benefits from a unique combination of a traditional investment trust holding income stocks alongside a cash-generative professional services operating business.

Source: AIC, data to 15 August

Of the names in the table, Chelverton UK Dividend has the highest yield at 7.5%. Two points to note: it invests in UK small caps – which can be more prone to cutting or cancelling dividends, and it also has very high ongoing charges – 2.44%, according to the AIC.

Another two names are worth highlighting for the income they offer today and income growth potential. The first is Dunedin Income Growth, which focuses on quality companies that meet its sustainability criteria as well as offering ‘real’ income growth over the long term. The trust focuses on names that can sustain dividends, even during tougher times. The portfolio includes UK-listed names like consumer goods giant Unilever and electricity network operator National Grid, supplemented by a couple of overseas selections in Novo Nordisk and ASML. The trust trades at a discount to net asset value (NAV) of 11%, has ongoing charges of 0.64% and yields 4.9%.

The other name in the list to highlight is JPMorgan Claverhouse, where a balanced approach, mixing growth and value, has helped deliver a measure of consistency in returns and where the company has pledged to increase dividends at a rate close to or above inflation. Steered by William Meadon and Callum Abbot, research firm Kepler notes the trust has outperformed in two-thirds of the quarterly periods since the former took over management of the trust in 2012. Like Dunedin there is a focus on quality as well as high yields, with top holdings including the likes of Shell and private equity outfit 3i Group. Ongoing charges are 0.7% and the historic yield is 4.8%.