Ian Cowie: bargains for the bold as tariffs take toll on markets

An unholy alliance of political surprises and a viral pandemic shocked stock markets three times in the past decade but several investment trusts succeeded in delivering high and rising income throughout the period. The Brexit vote in 2016, then Covid lockdowns beginning in 2020, and now Trump’s tariffs all sent share prices plunging.

• Invest with ii: Buy Investment Trusts | Top UK Shares | Open a Trading Account

Despite the turmoil, no fewer than 26 investment trusts, currently yielding at least 5% dividend income, sustained distributions throughout the past difficult decade, without fail, and delivered a positive total return.

Headlines will continue to focus on the drama of “Liberation Day” in America, now being followed by “Retaliation Day” in China and elsewhere. But, amid all the short-term noise, medium to long-term investors can draw some comfort from the sweet music of rising dividend income.

Annabel Brodie-Smith, a director of the Association of Investment Companies (AIC), told me: “There have been many times in the past decade when the most optimistic investors’ nerves have been tested.

“Currently, Trump’s tariffs are taking a toll on markets. However, investors who hold steady and don’t react to short-term movements are usually rewarded over the long term.”

• When markets fall, here’s what to avoid doing
• Fund ideas for investors of all persuasions

Here and now, it is only fair to add that the price of a high and rising income can often be low or no capital growth. For example, Greencoat UK Wind (LSE:UKW) is one of the 26 investment trusts that sustained big dividend distributions over the past decade but modest total returns.

This self-descriptive £4.5 billion fund of wind farms currently yields an eye-stretching 9.9% income that has increased by an annual average of 7.6% over the past five years, according to independent statisticians Morningstar. Better still, UKW avoided any dividend cuts over the past decade.

Less happily, UKW’s total return over the past decade is 64%, followed by a loss of -2% over five years and another loss of -20% over the past year. No wonder the shares continue to trade -31% below their net asset value (NAV).

Henderson Far East Income Ord (LSE:HFEL) is another of the 26 investment trusts identified by the AIC as having delivered high and sustained dividends over the past decade. But Trump tariffs have depressed the share price to the point where HFE currently yields 12%, albeit with modest 1.9% average annual increases in income.

Once again, those distributions were achieved against a backdrop of meagre total returns; specifically, 21% over the past decade, 0.1% over five years and a loss of -1.3% over the last year. Despite that, HFE's double-digit dividend yield remains attractive enough to income-seekers for this £350 million fund to trade at a premium of 5.7% above its NAV.

Even higher income is paid by another of the “dependable dividends 26” but with similar capital consequences at the £1 billion NextEnergy Solar Ord (LSE:NESF) fund. Higher than expected “risk-free returns” from government bonds have made this type of investment trust relatively less attractive, depressing share prices and pushing up NESF’s yield to 12.9% on Wednesday this week, after increasing distributions by a respectable annual average of 4.7% over the past five years.

Sad to say, that has been offset by meagre total returns of 26%, -17% and a positive 1.8% over the standard three periods. With Trump much less keen on renewables than his predecessor as president, the shares remain under a cloud and are priced -33% below NAV. That's the equivalent for buyers today of a “buy two, get one free” offer.

• Income funds that let investors have their cake and eat it
• Have defensive funds delivered during market sell-off?

Foresight Solar Ord (LSE:FSFL) fund is another member of the “dependable dividends 26” with total assets of more than £1 billion that trades -33% below its NAV. It currently yields 10.6% income rising by 3.4% but with disappointing returns of 40%, then losses of -2.4% and -0.3% over the usual three periods.

Contrarians - or investors who like to buy when most are selling - might hope to “do the double” with such shares, if they can sustain high dividends and supplement them with decent capital growth. However, the AIC’s analysis of the past decade shows that low dividends often led to the highest total returns.

To be specific, the four investment trusts that did best of all over the past 10 years were, in descending order, two private equity funds - 3i Group Ord (LSE:III) and HgCapital Trust Ord (LSE:HGT) - followed by two technology trusts - Allianz Technology Trust Ord (LSE:ATT) and Polar Capital Technology Ord (LSE:PCT). 3i Group yields meagre income of 1.7%, with HGT’s dividends even more slender at 1.1%, while ATT and PCT yield nothing at all.

However, all four more than compensated with capital growth. In the case of 3i Group, total returns were 873%, 412% and 22% over the usual periods but this £25 billion fund remains priced 45% below its NAV. If those unlisted valuations are correct, that's getting close to a “buy one, get one free” (BOGOF) offer.

So, whether your priority is a rising share price or reliable dividend income, there are plenty of investment trusts on offer at massive discounts. Nobody knows how the trade war will end but today’s out-of-favour shares might offer bargains for the brave.

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

Ian Cowie is a shareholder in Greencoat UK Wind (UKW) and Polar Capital Technology (PCT) as part of a globally diversified portfolio of investment trusts and other shares.