26 investment trusts yielding 4.5% or more: the key things to consider

For the first time in more than a decade, income seekers are spoilt for choice, as equities are no longer the only game in town to procure high yields.

Cash-like investments, such as money market funds, are typically offering yields of 5%, while the types of bonds viewed as the lowest risk, such as gilts, are offering similar levels of income. Investors who move further up the fixed-income risk spectrum will find higher yields. Bond yields across the board have been driven higher owing to interest rate rises over the past two years.

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For investment trusts that predominately invest in equities, there are 26 with yields of 4.5%-plus, and 18 yielding 5% or more.

Most of those offering high income are trading on a discount, and in some cases a double-digit discount.

Among the 4.5%-plus yielders are long-established UK equity income portfolios Merchants Trust (LSE:MRCH), JPMorgan Claverhouse (LSE:JCH), and City of London (LSE:CTY).

The trio are “dividend heroes”, having consistently raised payouts for decades.

However, the highest-yielding dividend hero, with 23 consecutive years of income increases, is abrdn Equity Income Trust (LSE:AEI) yielding 7.2%.

Most of the highest yielders invest in UK dividend-paying companies. As well as the aforementioned dividend heroes, the other UK trusts that feature in the table are Marwyn Value Investors (LSE:MVI), Chelverton UK Dividend Trust (LSE:SDV), abrdn Equity Income Trust (LSE:AEI), CT UK High Income (LSE:CHI), Shires Income (LSE:SHRS), Athelney Trust (LSE:ATY), Lowland (LSE:LWI), Dunedin Income Growth (LSE:DIG),  Schroder Income Growth (LSE:SCF), and Diverse Income Trust Ord (LSE:DIVI).

The highest-yielding equity and flexible investment trusts

Source: Association of Investment Companies and Morningstar. Data to 27 October 2024. Includes investment trusts in equity sectors and in the Flexible Investment sector. Excludes Venture Capital Trusts and alternatives. Excludes investment trusts where wind-up or restructuring plans have been proposed.

The key things to size up with these high yields 

There are a few things to bear in mind when considering these high-yielding options. First, investment trusts tend to be more volatile than funds over shorter periods due to discounts potentially widening and the ability to gear (borrow to invest), so make sure you are comfortable with that.

Second, consider the strength of the dividend reserves, which enables investment trusts to bolster dividend payouts in leaner years. The revenue reserve figure, expressed in years, is published on the Association of Investment Companies (AIC) website.

A third consideration is that some trusts pay dividends as a fixed percentage of the net asset value (NAV). Typically, these pay out 4% of NAV per annum as a dividend, often calculated using the NAV at the trust’s year-end. Therefore, investors need to be aware that in years when the NAV on these trusts falls, the total dividend paid and the prospective yield in the following year are also likely to decline. 

How income is generated from the underlying investments is also important. Some investment trusts finance their dividends from capital as well as income. This approach is all well and good when capital returns are being delivered, but it tends to be more erratic when stock markets are more volatile. 

Another thing to remember is that high yields do not mean market-beating returns from a total return perspective, when both capital and income are combined.

In addition, dividend growth may be higher for trusts with lower yields today. 

Finally, while there are no excessive premiums in the above table, there are some modest premiums. As a result, investors buying today are paying more than the underlying assets are worth. In general, investors should be cautious when a premium is 5% or higher since premiums do not tend to be sustainable over time.