What’s the catch with investment trusts yielding above 5%?
We explain how certain trusts can generate a high yield and pick two to buy
By Tom Sieber, Shares Magazine, 13 Feb 2020
Little is more satisfying in investing than receiving a dividend payment from one of your holdings and investment trusts have an excellent track record of delivering a regular stream of income…
In this article we will concentrate on the trusts with yields of between 5% and 10%, above which the yield is likely to be an anomaly, quirk of the data or situation where the dividend is almost certain to be on the chopping block…
A RED FLAG?
A high yield can attract investors seeking the generous income on offer, but it should also be considered as a red flag as it often means a dividend is considered by the market to be unsustainable and can reflect a falling share price…
RUNNING HARD
The FTSE All-Share is often used as the benchmark for the UK stock market. It is currently yielding 4.2%.
QuotedData analyst James Carthew says: ‘For an equity fund to achieve a yield a quarter higher than the market yield it would have to be running quite hard.
‘A trust probably has two ways to achieve that; it can invest in high yielding, value type situations, potentially at the expense of some capital growth, or it can use some engineering to avoid buying really high yielding stuff…
The ‘engineering’ referenced by Carthew can include the use of options or purchasing different classes of share which offer higher income. He adds this is ‘not necessarily a bad thing’.
He cites the example of Shires Income (SHRS) which uses lower cost debt to buy a portfolio of higher yielding preference shares. It trades on an historic yield of 4.6%. Another popular income-focused trust offering a yield just below the 5% threshold is Merchants (MRCH), on a yield of 4.9%.
Two high-yielding trusts to buy
AEW UK REIT (AEWU)
Henderson High Income (HHI)…
Read more here