In the current environment of low interest rates and bond yields, the need for income has pushed many investors up the risk scale.
However Rob Gleeson, head of FE Research, says the yield always needs to be taken with a pinch of salt as it is calculated historically. This means that the level an investor actually gets could be much lower than the yield they see on the factsheet.
"The first thing to look at is that the published yield is the last 12 months' dividend divided by the price of the fund," he said.
Gleeson explains that the fund’s headline yield depends on the underlying price at the time it is calculated: if the price of the fund has fallen then the yield will seem to have grown, but this is a sign of share price weakness in the underlying companies rather than the manager's skill.
He says that the stability of the yield is a key thing to look for, as it gives a better idea of how the manager has run the portfolio.
Rob Morgan, investment analyst at Charles Stanley, said: "The yield is a snapshot in time of the amount of income thrown out of the portfolio's capital value."
"So if the price of the unit was to go up on average the value of the underlying investment will go down as well: it is an inverse relationship."
Gleeson adds that a low-yielding fund can paradoxically end up providing a good income.
"The second point, which is the converse of the first, is that as the price of the fund increases so should the yield."
"So if the fund has a yield of 1 per cent, but the price of the fund is increasing 10 per cent each year, then the investor will be seeing a very, very good level of income. Growth funds can make very good income funds over time in that respect," he added.
Gleeson says that this inverse relationship has counter-intuitive results, and a headline yield that seems stable is the opposite from the point of view of investors.
“If the yield is stable at 4 per cent that means the income flows will be quite unstable.”
“The amounts paid out are going up and down with the price.”
“But if the yield is going up and down that means the yield you receive is stable.”
Morgan said: "Investors look for top-yielding equity income funds such as Schroder Income Maximiser or Newton Higher Income, which have a historically high yield but the point is it might not be sustainable."
"It would be better to go for a lower yield which is growing over time. So it would be better to go for a company that pays a 3 per cent yield but will double it over time rather than one that pays 6 per cent and won’t grow, because of the superior total return."
Investment trusts operate differently to their open-ended counterparts and are allowed to hold back a percentage of their annual returns in order to pay or boost their dividend through rising or falling markets.
Open-ended funds do not have this luxury.
Charles Cade, investment trust analyst at Numis, says there are a number of issues investors need to think about when buying an income-focused trust and agrees that they should never chase a high headline yield.
"Yields can be fairly complicated with investment trusts," he said. "Ultimately, you need to look at where the trust is getting its revenue from. It could be generating it from fixed income, equities, option writing and underwriting."
"Also, you need to look at how much revenue they are getting and what is being paid out to investors."
"You have to make sure the trust has suitable earnings cover especially when it comes to future growth."
"Also, it is important to look at a trust’s historic record of what the board’s intention has been – either grow it or keep it stable."
He also points out that a high yield can often hamper a fund’s ability to generate growth – something FE Trustnet looked at in detail in a study last year.
"Trusts with a higher yield might maintain their income over the long-term, but investors would miss out on capital growth."
FE Trustnet recently showed that there are a number of investment trusts that have managed to increase their dividend year-on-year over the last four decades.
Alliance Trust is one of three trusts to have achieved this feat over the last 46 years.
However, with a published yield of 2.12 per cent it is hardly eye-catching compared with other income-focused investment trusts or open-ended funds.
Cade says that investors are becoming too hung-up on headline yields and instead should have a total-return mindset.
"Ultimately, when you look for too high a yield it will impact on capital. If a trust maintains a lower level of yield then the manager is less likely to be restricted."
"I think investors should focus more on total return as you don’t want a manager that can only hold high-yielding assets."
"However, the hunt for yield has meant many income funds are now trading on premiums. My feeling is that investors tend to focus too much on income; you can always sell in order to generate additional cash."
A manager’s ability to grow or maintain yield is the key element for both Gleeson and Cade.
Richard Hunter, head of equities at Hargreaves Lansdown, says that those who invest directly in stocks are also too caught up with headline yield.
The blue chip insurers Aviva and RSA – which are popular stocks among income-hungry investors – are two companies that have had to slash their dividend recently, which has had an adverse effect on their share prices.
Hunter said: "There are a number of reasons for investors’ concerns over dividend cuts, one of which is that it is possible that the dividend was the main reason why they bought the stock."
"The other reason is that a reduction in the dividend can be seen as a sign of financial weakness."
"We saw recently with Aviva, it had to cut its dividend because at its previous levels the management didn’t feel it was sustainable."
"Another reason is that in the current environment where companies have continued to generate cash, investors feel that the ones who cut their dividend have missed the boat in some respects," he added.
The FTSE 100 listed company RSA recently cut its dividend yield from 6.06 per cent to a "still punchy" 5.5 per cent.
Hunter thinks that a lot of the time investors may be acting unfairly when they discard a stock when it reduces its dividend.
"As we saw with Tesco last January, I do think there are some overdone, knee-jerk reactions. In the case with Aviva, it was a financially prudent move to cut the dividend," he said.
"But in a jittery market like the one we are in there can be overly knee-jerk reactions, but a dividend cut can just simply surprise investors, so they will sell."