As markets and share prices have risen, the number of trusts primarily investing in equities that have a yield of at least 4 per cent has fallen from 14 last August to 11 currently, according to new research by stockbroker Stifel.
Share prices and yields have an inverse relationship, so a high investment yield is usually a sign that a stock is out of favour for some reason. For those investors prepared to take equity risk, these investment trusts may be attractive in the current low interest rate environment.
Some of these trusts currently trade on a discount, according to Stifel. For example, Dunedin Income Growth has a historical yield of 4.6 per cent and is on a 10 per cent discount to NAV (well below its one-year high of -7.2 per cent). Murray Income is also on a 10 per cent discount (one-year high -6.5 per cent), with a 4.3 per cent yield.
Merchants has a yield of 5.2 per cent, with the shares on a 5 per cent discount (against a one-year high of -2.2 per cent. The portfolio focus is on FTSE 100 companies and the trust typically has c.20-25 per cent leverage.
Investment trusts are generally an attractive route to income for investors, as – unlike open-ended funds, which have to pay out all the dividends they receive from the companies they invest in – they can build up meaningful revenue reserves of up to 15 per cent that can be useful in leaner years when there are dividend cuts from underlying holdings.
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