There were 15 investment trust sectors where the average yield was 3 per cent or more at the end of May 2019, according to research by the Association of Investment Companies (AIC), while two peer groups had a yield in excess of 8 per cent.
The research, which follows the AIC’s sector review that took effect on 28 May 2019, shows that the highest yields tend to be on offer in alternative sectors such as those focusing on debt, although more mainstream areas like UK equity income are also represented.
Annabel Brodie-Smith, communications director of the AIC, said: “There is an array of choice for income-seeking investors who are considering investment companies.
Source: Association of Investment Companies
“Clearly substantial yields are available from sectors investing in alternative assets such as specialist debt, leasing, property and infrastructure. That said, there are four equity sectors amongst the highest-yielding and several have delivered healthy levels of dividend growth over five years.
“It’s important income investors realise that higher yields can come with higher risks and investors need to do their investment research thoroughly. If investors have any doubts as to whether investment companies are suitable for them, they should speak to a financial adviser.”
The table above shows that the IT Debt – Structured Finance sector with the highest dividend yield, standing at 9.19 per cent at the end of May 2019.
As its name suggests, trusts in this peer group focuses on investment opportunities in structured finance, or a complex form of financing using instruments such as collateralised load obligations (CLOs), syndicated loans and mortgage-backed securities.
There are nine trusts in the sector and the highest yield at the moment is from Fair Oaks Income, at 13.4 per cent. This trust concentrates on US and European CLOs or other structures that provide exposure to portfolios consisting primarily of US and European floating-rate senior secured loans.
Fair Oaks Income has made the peer group’s highest total return over three and five years; over five years, it’s up 43.66 per cent – compared with a 1.13 per cent gain from its average peer.
The trust is trading on a discount to net asset value (NAV) of 1.5 per cent. An initial investment of £10,000 made five years ago has led to dividend payouts of £9,266 since.
Performance of trust vs sector over 5yrs
Source: FE Analytics
Other high-yielding members of the IT Debt – Structured Finance sector include Blackstone/GSO Loan Financing (12.2 per cent on its ordinary shares, 13.4 per cent on its C shares), Chenavari Toro Income (10.4 per cent) and Carador Income (10.3 per cent).
The IT Leasing sector comes next in the AIC’s research, with an average yield of 8.27 per cent. This is a specialist sector that invests in assets to be leased, such as aircraft, ships and manufacturing equipment.
Doric Nimrod Air Two and Doric Nimrod Air Three – which both acquire, lease and then sell aircraft to generate capital growth and income – share the highest yields at 9.7 per cent.
Both are also trading on premiums to NAV – 11.9 per cent in the case of Doric Nimrod Air Two, 32.3 per cent for the other trust – while their respective five-year total returns stand at 16.6 per cent and 18.5 per cent. An initial investment of £10,000 made five years ago in Doric Nimrod Air Two has created £3,774 in dividends.
Like many members of the sector, they have high gearing – 127 per cent for Doric Nimrod Air Two and 169 per cent for Doric Nimrod Air Three. The highest gearing of the sector, however, is Amedeo Air Four Plus at 515 per cent.
In terms of other IT Leasing trusts with high yields, DP Aircraft I has a yield of 9.5 per cent, Amedeo Air Four Plus yields 8.9 and SQN Asset Finance Income’s (C shares) stands at 8.1 per cent.
The table above shows how investors seeking out the highest yields have to look towards alternative sectors, with IT Property – Debt, IT Debt – Direct Lending, IT Commodities & Natural Resources and IT Renewable Energy Infrastructure all being at the top of the table.
That said, the popular IT UK Equity Income sector has made it onto the list thanks to its average yield of 3.97 per cent.
The peer group’s average yield has been pushed up by the 22.6 per cent form British & American. Its portfolio is built around other investment trusts and other leading UK- and US-quoted companies.
It is trading on a 23 per cent premium to NAV but has made a loss of 38.4 per cent in total return terms over the past three years. An initial investment of £10,000 resulted in income payouts of £4,604; it has also increased its dividend for the past 24 years.
Despite British & American skewing the sector’s average yield, every other IT UK Equity Income trust aside from Finsbury Growth & Income is yielding more than 3 per cent; Finsbury Growth & Income yields 1.7 per cent.
High yields can be found among the likes of The Investment Company (6.4 per cent), BMO UK High Income (5.6 per cent), Merchants (5.3 per cent), Chelverton UK Dividend (5.2 per cent) and Aberdeen Standard Equity Income (5 per cent).