10 UK equity income trusts offering 4%-plus yields

British shares are still cheap and high yielding despite a strong 12 months of performance.

British stocks have returned to favour with investors, with the domestic market finally near the top of the global performance charts over the past year.

The FTSE All-Share Index has risen by 5.7% on a total return basis and the FTSE 100 has delivered a return of 8.2%. In contrast, US shares, in dollar terms, have fallen 8%.

But experts reckon UK shares have much further to rise, given the low price-to-earnings multiples (which measure how expensive shares are versus profits), and high dividends yields.

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Stifel, the investment trust analyst, says: “In a contrarian view, we think the UK may be quite a good market to continue to invest in this year, with the gloomsters disappointed.”

The “gloomsters” point to a weak economy and high interest rates as reasons to avoid UK shares.

Vivek Paul, UK chief investment strategist at the BlackRock Investment Institute, is one of them. He says: “Inflation is set to fall but, in the long run, will remain above the Bank of England’s target as supply shortages prevail. High vacancies, low productivity, ageing demographics, and falling forecasted net migration suggest real challenges ahead for Britain.”

But Stifel calculates that price to earning (p/e) ratios for UK shares based on 2023 forecast earnings “do not appear stretched”, with the FTSE 100 Index on a p/e multiple of 10.2 and FTSE All-Share on a p/e of 10.5. In comparison, the S&P 500 is on a 2023 p/e of 18.1 and the FTSE Europe (ex UK) is on 13.6 for 2023.

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The analyst argues that UK Equity Income investment trusts are well positioned to benefit if the UK stock market continues to deliver in the year ahead.

In the past year (to 30 January 2023), the best performers in net asset value (NAV) total return terms included Schroder Income Growth Ord (LSE:SCF), City of London Ord (LSE:CTY), and Merchants Trust Ord (LSE:MRCH), up respectively 8.8%, 6.1% and 5.2%.

This generally reflects the higher weightings in sectors such as oil and gas and miners, which had a bumper year on the back of higher commodity prices.

On a six-month view, there has been some strong performance from trusts such as Temple Bar, JPM Claverhouse and Edinburgh Investment Trust, up 11.5%, 7.7% and 6.7%.

More generally, cheap shares have also come back into favour as interest rates have risen, which makes investors value profits today more than future profits. Stocks with high dividend yields tend to be cheaper, as a high yield is a reflection of strong profits returned to shareholders but a low share price.

Which trusts yield the most and least?

Yields are typically between 4% and 5% in the sector, with some trusts that focus on more expensive shares yielding less, such as Finsbury Growth & Income (2.1% yield) and Troy Income & Growth (2.8%).

The highest yielder is abrdn Equity Income, which is managed by Thomas Moore, and has a focus on out-of-favour companies. It yields 6.5%.

Lowland, management by Janus Henderson, yields 5%, while City of London yields 4.7%.

City of London, managed by Job Curtis for more than 30 years, has 56 years of consecutive dividend growth, making it a “dividend hero”, according to the Association of Investment Companies (AIC). It is a member of our Super 60 investment ideas. 

This reflects both the trust’s revenue reserves, with 9.5p of revenue reserve per share compared with an annual dividend of 19.6p, and good dividend cover from revenues received by the trust, at 1.06 times in the year to June 2022.

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Diverse Income Trust is also on the ii Super 60 list. It yields 4.1% and has a bias towards smaller company shares.

The UK Equity Income Sector is on an average discount of around 1%, which is also close to the one-year average discount level of 2%. While average discounts widened modestly to 2.5% during the sharp equity market fall at the end of September, they narrowed again quite quickly once the market started to recover.

The widest discounts are currently on Edinburgh (8%), Murray Income (8%) and Lowland (10%), which may partly reflect the latter's relatively high exposure to mid and small-cap companies, according to Stifel.