Income-seeking investors could have earned £8,130 a year by picking the highest-yielding investment trusts.
Analysis by online broker AJ Bell reveals the ultimate income trusts with a track record for high payouts over the long term.
AJ Bell says the average return of these so-called ‘dividend heroes’ over the past 10 years is a hefty 207 per cent, while the top performer has delivered a staggering 481 per cent over that period.
The platform has unearthed investment trusts which have increased their dividend for at least 10 consecutive years. It also analyses the yield based not just on today’s share price, but on the share price if you had invested 10 years ago.
For example, if a trust has a share price of 200p and pays a dividend of 6p per share, then it has a yield of 3 per cent. But if you had purchased the shares when they cost 100p, the actual yield you are receiving today is 6 per cent.
On this basis, some 21 investments trust have a yield of 6 per cent or more on a 10-year perspective, while 12 yield at least 7 per cent. The highest-yielding trust among the group is British & American, which has a yield of 10.4 per cent based on its share price a decade ago. Those who put £10,000 into the fund and reinvested their dividends over the period would be up 139 per cent.
While British & American has the highest yield today, it is not the top-performing trust in the pack. Those who backed Henderson Smaller Companies 10 years ago and reinvested their dividends over the period would have generated a total return of £51,700.
Read more about manager Neil Hermon’s approach to stock-picking success here.
Other top performers include BlackRock Smaller Companies, which has delivered a total return of 480 per cent over the past decade, and Scottish Mortgage, up 438 per cent.
A £100,000 portfolio spread evenly across the 10 dividend hero trusts a decade ago would now be worth £456,000, generating an annual income of £5,370.
Laura Suter, personal finance analyst at AJ Bell, says: ‘What makes these trusts more compelling is their proven ability to increase their payouts each year. Any investor would be pretty happy with City of London yielding 7.1 per cent today based on 2008’s share price, coupled with a 51-year track record of rising dividends.’
Investment trusts are often well-suited to providing steady income over the long term because their closed-ended nature means managers can ride out market volatility or ups and downs in performance without being forced to sell their holdings because of investor redemptions.
As well as this, trusts are able to hold back up to 15 per cent of the income they receive each. Known as smoothing, this means they have money in reserve to pay out to investors even in leaner years.
The top 15 dividend heroes by total return