Ian Cowie: 10 inflation-busting investment trusts yielding at least 4%

Our columnist names high-yielding investment trusts that have grown their dividends ahead of inflation over the last five years.

Which are the top 10 investment trusts with a tried-and-tested ability to keep investors’ income rising ahead of inflation and which deliver the highest dividend yields today? That question gained added urgency this week when one of the world’s biggest investment banks, Citi, predicted that Britain’s consumer prices index (CPI) will hit 18.6% next January.

The good news is that investment trusts did much better than other shares or open-ended pooled funds, such as unit trusts, at sustaining investors’ income during the Covid crash of 2020. While 52% of Britain’s biggest businesses listed in the FTSE 100 index cut or cancelled payouts that year, and almost half as many unit trusts did so, only 15% of equity-based investment trusts reduced shareholders’ income during the pandemic panic.

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So, I asked the Association of Investment Companies (AIC) to interrogate independent statisticians Morningstar’s database to identify the top yielders among trusts that have delivered increases above CPI inflation over the last five years. Bearing in mind the familiar mantra about the past not necessarily being a guide to the future - plus stripping out tiddlers and ‘black box’ funds that are heavily invested in themselves - here they are.

abrdn Equity Income Trust (LSE:AEI) leads the pack by paying out 6.6% dividend income today and, by coincidence, achieved the same average annual rate of dividend increase over the last five years. That was nearly twice as much as the 3.5% average rate of increase in the CPI over the same period. This ‘UK Equity Income’ trust delivered its inflation-busting income from a blue-chip portfolio led by the oil giants BP (LSE:BP.) and Shell (LSE:SHEL) with the world’s biggest miner, BHP Group (ASX:BHP) also in AEI’s top 10. It is managed by Thomas Moore and Iain Pyle.

Perhaps surprisingly, another UK Equity Income trust ranks second. Chelverton UK Dividend Trust (LSE:SDV) pays nearly 6.4% income and increased this by an annual average of 6.7% over the last five years. It has a much less mainstream portfolio, led by estate agents and property managers Belvoir Group (LSE:BLV); the self-descriptive DFS Furniture (LSE:DFS); and the wealth manager Brewin Dolphin (LSE:BRW). Prospective purchasers should beware the presence of zero dividend preference shares, which rank ahead of SDV’s ordinary equity for a portion of capital growth.

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Bronze medal stays in Britain with Montanaro UK Smaller Companies (LSE:MTU), which pays 5.4% income having raised this by an eye-stretching annual average of 25% following a change of dividend distribution strategy during the last five years. Its portfolio is led by 4imprint Group (LSE:FOUR), a maker of marketing gimmicks; Kainos (LSE:KNOS), the Irish software business; and the ship-broker Clarkson (LSE:CKN).

CT Global Managed Portfolio Income (LSE:CMPI), in the ‘Flexible Investment’ sector, ranks fourth, paying 5.1% income, rising by 4.1%. A portfolio of other investment trusts is led by Law Debenture (LSE:LWDB), with 3i Infrastructure (LSE:3IN) (3IN) and Henderson International Income (LSE:HINT) diminishing risk by diversification.

Lowland (LSE:LWI), a stalwart of the ‘UK Equity Income’ sector since its launch in 1963, ranks fifth; paying 4.9% income, rising by 6% per annum over five years. Shell and BP are among the top 10 holdings, which also contains big miner Anglo American (LSE:AAL).

JPMorgan Claverhouse (LSE:JCH), another stalwart of the same sector and formed in the same year, stands sixth with 4.6% income, rising by 5.8% per annum. In addition to the familiar BP and Shell, its top 10 holdings are led by the pharmaceutical giant AstraZeneca (LSE:AZN), followed by the miners Glencore (LSE:GLEN) and Rio Tinto (LSE:RIO).

Invesco Asia (LSE:IAT) is the first Far East entry, ranking seventh with 4.6% income and - once again due to change of dividend policy - annual average uplifts of nearly 29%. The self-descriptive chip-maker Taiwan Semiconductor Manufacturing (NYSE:TSM); Korean electronics giant Samsung Electronics (LSE:SMSN); and Chinese online multimedia group Tencent (SEHK:700); are its top three holdings.

Back to Blighty, Schroder Income Growth (LSE:SCF) lived up to its name with a 4.2% yield, rising by 3.8%. Its top holdings are Shell, AstraZeneca and the biopharmaceutical company, formerly known as GlaxoSmithKline, but now dubbed GSK (LSE:GSK).

Henderson International Income (LSE:HINT) is our penultimate inflation-buster with a yield of 4.2%, and dividend income rising by nearly 6.3% per annum. It fulfils its ‘Global Equity Income’ remit with top three holdings in the American software giant MicrosoftMicrosoft (NASDAQ:MSFT); the French pharmaceutical leader Sanofi (EURONEXT:SAN); and the biggest food company in the world, Switzerland’s Nestle (SIX:NESN).

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Finally, Diverse Income Trust (LSE:DIVI), in the ‘UK Equity Income’ sector, pays 4% income, rising by 5.4%. Managed by Gervais Williams and Martin Turner, its off-piste portfolio is led by the Aberdeen-based oil and gas group i3 Energy (LSE:I3E); followed by the Selby-based renewable energy generator Drax Group (LSE:DRX); and the spread-betting broker CMC Markets (LSE:CMCX).

It is only fair to add that sometimes the price of a higher income today is a lower total return in future. But Nick Britton, head of intermediary communications at the AIC, told me: “Many shareholders in investment companies rely on dividends to pay for everyday living expenses. To deliver a more predictable stream of income, boards of directors have the ability to hold some back in good years to pay it out in leaner times.

“This has led to many investment companies building up multi-decade records of dividend increases, including the ‘dividend heroes’ that have a record of at least 20 years growing dividends, including during the global financial crisis.”

Here and now, as many investors in ‘jam tomorrow’ growth shares that pay low or no income are discovering the hard way today, dividends are a comfort in bad times when stock markets fall. Income can pay us to be patient and may keep us warm, with the lights on, while we wait for better days in future.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in BHP Group (BHP) and Nestlé (NESN) as part of a globally diversified portfolio of investment companies and other shares.