"[There is] a yield on the FTSE All Share Index of 3.7 per cent. We calculate there are around 25 funds which primarily invest in equities and currently yield 4.0 per cent or more," analyst Iain Scouller said.
"A number of these trusts are trading on fairly high premiums to their estimated NAVs and look expensive in our view."
Highest-yielding investment trusts
| Fund |
Historic yield (%) |
Premium/disc (%) |
Market cap (£m) |
1-yr NAV growth (%) |
3-yr NAV growth (%) |
| European Assets |
8.4 |
8 disc |
83 |
2.6 |
-22.6 |
| Shires Income |
7 |
1 prem |
51 |
-1.7 |
-14.7 |
| Merchants Trust |
6.4 |
12 prem | 369 |
-6.4 |
-15.7 |
| British Assets |
5.2 |
1 prem | 341 |
-3.1 |
-8.5 |
| Henderson Far East Income |
5.2 |
6 prem | 284 |
-7.5 |
9.6 |
Source: Oriel Securities
The highest-yielding trust is F&C’s European Assets Trust, where the board resets the rate of dividend annually, and it is partly financed by effectively paying out capital as dividend.
The vehicle’s performance has been volatile over the past five years, losing more than its sector average during the 2008 crash, but not recovering as quickly. Performance has picked up in the past 12 months, however, as the trust has started to outperform its sector.
Performance of trust vs sector over 5-yrs
Source: FE Analytics
Other high-profile high-yielding trusts include Edinburgh IT, which is on a 9 per cent premium, and Merchants Trust, which is on a 12 per cent premium. Meanwhile, Patrick Edwardson’s £288.5m Scottish American Investment Company is on a 9 per cent premium, compared with a one-year range of a 3 per cent discount to a 10 per cent premium.
For investors looking outside the UK for high yields, Henderson Far East Income has a yield of 5.2 per cent, with investments in Asian and Australian equities and preference shares.
Scouller warned: "We think the significant premium that equities are yielding compared with the 10-year UK gilt yield of 2.4 per cent may indicate that the market is anticipating substantial future dividend cuts from some of the highest-yielding equities."
"It is worth noting that many of these higher-yielding investments trusts have substantial dividend reserves which can be used to maintain or increase dividends at times when the dividend payable is not fully covered by annual revenues."
"We see the ability to use revenue reserves as an advantage that investment trusts have over some other investment products."