Only 14 equity investment trusts are currently paying out more than 4 per cent, meaning investors have limited choice if they want a significant premium over the FTSE All Share’s 3.4 per cent yield.
A strong year for the stock market has seen share prices on trusts rise and discounts narrow, squeezing the yield paid out to investors.
This means they are likely to have to put their money in a highly geared trust or one seeing share price falls to get the biggest returns, according to data compiled by Oriel Securities.
The study excluded trusts with less than £50m in AUM.
Some trusts such as Acorn Income IT offer comparable yields but are also excluded from the list thanks to their split-capital structure, whereby zero-dividend preference shares are used as borrowing facilities to boost yield for ordinary investors.
The Merchants Trust
currently has the highest yield available, at 5.4 per cent.
The £440m trust is run by Simon Gergel for Allianz and focuses on FTSE 100 companies, with Royal Dutch Shell, GlaxoSmithKline and BP the three largest holdings.
It has outperformed its FTSE 100 benchmark in both NAV and share price terms over one and three years.
Performance of trust vs index over 3yrs
Source: FE Analytics
However, Iain Scouller, analyst at Oriel Securities, said: "The trust is normally quite highly leveraged – this was 23 per cent of NAV on 28 February."
"The leverage was one factor helping Merchants to outperform the FTSE 100 index total return benchmark over the year to 28 February, with the NAV total return up 21 per cent versus a rise of 12 per cent for the index."
AIC data shows the gearing remains high, at 21 per cent.
The trust is on a discount of 2.7 per cent, which helps to boost its headline yield figure.
Ongoing charges are 0.66 per cent according to the AIC.
Henderson High Income Trust
is currently yielding 5.3 per cent, according to Oriel data, despite sitting on a premium of 2.6 per cent.
The five crown-rated trust invests in larger and smaller companies, and also uses gearing extensively – 24 per cent of NAV according to the AIC.
The £146m trust is run by Alex Crooke and is more diversified than Merchants, with 103 holdings to the former’s 49.
The trust has a performance fee on top of ongoing charges of 0.89 per cent.
BlackRock Commodities Income IT
yields a healthy 5.2 per cent, with a more modest gearing of just 8 per cent of NAV.
The portfolio is diversified geographically in terms of exposure, although with a bias towards North America. It has a higher weighting to oil and gas rather than mining.
Commodity funds have been under pressure recently, and the fund has lost 5.5 per cent in NAV terms over the past year and 18.3 per cent over three.
This means that investors will have to take on a substantial amount of risk to maintain the high yield.
The trust is on a premium of 1.5 per cent and has ongoing charges of 1.29 per cent.
BlackRock World Mining IT
also appears on the list, with its yield boosted by even worse NAV performance – down 22.6 per cent over the past year.
Performance of trust vs benchmark over 3yrs
Source: FE Analytics
The trust is yielding 4.1 per cent and is on a discount of 3.3 per cent, according to Oriel data.
is yielding the same as BlackRock Commodities Income – 5.2 per cent – and has a better track record in capital growth terms, with NAV up 24 per cent over the past year.
Run by Ed Beal for Aberdeen, the portfolio diversifies away from the large cap names that dominate its top-10 with an 8.2 per cent holding in the Aberdeen Smaller Companies High Income
It also has 27.2 per cent in fixed income, meaning that it arguably should not qualify for this list.
In total, 48 per cent is exposed to the financial sector, an area many managers are avoiding, although a large amount of that comes through bond rather than equity positions.
The trust has ongoing charges of 1.09 per cent.
Source: Oriel Securities
For investors who want UK exposure, the City of London Investment Trust
is yielding 4.1 per cent, with modest gearing of 8 per cent of NAV.
However, Standard Life Equity Income
has the same yield and is on a discount of 3.3 per cent, compared with the City of London’s 2.9 per cent premium.
Neil Woodford’s (pictured) Edinburgh Investment Trust
is no longer an option though, thanks to its success.
"Unfortunately Edinburgh Investment Trust has fallen out of our list of 'high yielders' following a 9 per cent rise in the share price in the last couple of months," Scouller said.
"This has had the impact of reducing the yield from 4.1 per cent to 3.8 per cent. This price rise has lifted Edinburgh from trading on a 2 per cent premium to a 5 per cent premium."
Scouller added: "Funds investing overseas with high yields include European Assets (5 per cent yield), where the board resets the rate of dividend annually and this is partly financed by paying out capital."
"Henderson Far East Income
has a yield of 4.6 per cent, with investments in Asian and Australian equities and preference shares."
has a yield of 4.7 per cent and the discount is currently relatively wide, at 6 per cent."