Ian Cowie: five trusts outpacing and yielding above inflation

With UK inflation now at an almost three-decade high, our columnist runs through ‘five of the best’ investment trusts for inflation-busting income.

Inflation is investors’ insidious enemy because it stealthily robs our returns of their real value or purchasing power. Fortunately for those of us aiming to pay for fun in future, investment trusts have unique powers to protect and sustain rising income for shareholders.

Now, exclusively for readers of interactive investor, the Association of Investment Companies (AIC) and independent statisticians Morningstar have identified five trusts that succeeded in delivering dividends that increased faster than inflation over the last five years. However, it is important to point out that different investors will have different priorities and the price of a high and rising income can be low - or even no - capital growth.

Three criteria were applied by AIC to Morningstar statistics to sift out ‘five of the best’ investment trusts for inflation-busting income. First, they had to avoid any dividend cuts over the last five years; no mean achievement after the coronavirus crisis forced most FTSE 100 stocks to cut or cancel payouts in 2020.

Second, they had to deliver dividend growth of at least 2.5% per annum because that was the average rate of inflation - as measured by the Consumer Prices Index (CPI) - over the last five years. Third, they have to yield at least 5.4%. As it was revealed yesterday that was the annual rate of increase in the CPI in the year to last December, the highest rate of ascent in 30 years. All the figures in the text are based on AIC calculations as of 10 January.

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So, without further ado, here are five of the best investment trusts for inflation-busting income. Aberdeen Standard Equity Income (LSE:ASEI) leads the pack with the highest five-year dividend growth rate of 6.6% and a current yield of 5.9%. This £180 million investment trust sits in the AIC ‘UK Equity Income’ sector and includes among its top 10 assets - in diminishing order by value - the world’s biggest miner, BHP Group (LSE:BHP); another big miner, Rio Tinto (LSE:RIO); and the oil giant, Royal Dutch Shell (LSE:RDSB). ASEI delivered total returns over the last one, five and 10 years of 24%, 21% and 118%.

Second among our ‘five of the best for inflation-busting income’ stands Sequoia Economic Infrastructure Income (LSE:SEQI) with five-year dividend growth of 5.9%, and currently yielding 5.9%. This £1.8 billion fund sits in the AIC’s ‘Infrastructure’ sector and its international portfolio is led by the Spanish transit system, Madrid Metro; followed by the Northampton-based renewable energy business, Infinis Energy; and the global owner of mobile phone masts, AP Wireless Junior. Total returns over the last one, three and five years were 2.9%, 9.3% and 22%.

Third on our podium stands Henderson Far East Income (LSE:HFEL) in the ‘Asia Pacific Income’ sector with five-year dividend growth of 3.2% and an eye-popping yield of 8%. Its biggest asset is Bank Of China (SEHK:3988) - one of the reasons I sold out of HEFL last August - followed by RIO and BHP. Total returns over the last one, five and 10 years were -3.1%, 19% and 91%.

Fourth ranks BMO UK High Income (LSE:BHI) a ‘UK Equity Income’ fund with five-year dividend growth of 2.9% and yielding 5.8%. Top assets are led by the international specialist publisher, RELX (LSE:REL); the pharmaceutical giant, GlaxoSmithKline (LSE:GSK); and self-descriptive British American Tobacco (LSE:BATS). Total returns over the three standard periods were 7.2%, 23% and 104%.

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Fifth, in the ‘Renewable Energy Infrastructure’ sector, stands Foresight Solar (LSE:FSFL), with dividend growth of 2.5% and yielding 6.8%. Perhaps surprisingly, top assets are led by Bristol-based hazardous waste management business, Augean; the information technology company, Mi-Pay Group; and the London-based satellite operator, Avanti Communications. Total returns over one, three and five years were 7.4%, 9.6% and 29%.

Nick Britton, head of intermediary communications at the AIC, told me: “As consumer price inflation reaches levels not seen for a decade, investors may be thinking about how they can secure an income that keeps up with rising prices.

“Although there are no guarantees, investment companies can reserve money in good times to pay out in leaner years, which enables them to smooth dividends over time. They can also invest in a wider range of assets, including less liquid assets such as renewable energy infrastructure, which have been able to generate attractive and consistent levels of income.

“Investment companies that invest in infrastructure projects may also have revenues that are contractually linked to inflation. These kinds of companies can provide diversification, helping reduce the reliance on a limited pool of large-cap companies that can be one of the key challenges for an income investor.”

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For example, many investors - including me - relied too heavily on the City saying “never sell Shell” before the oil major cut its dividend for the first time since the Second World War during the pandemic panic of 2020.

Despite recovery in the oil price and this dividend stock since then, there is some evidence that smaller companies can compensate income-seekers for lower initial yields with higher payouts and total returns over the medium to long term. But that is a story for another day and this ‘five of the best for inflation-busting income’ shows how some investment trusts with high yields have delivered rising dividends ahead of inflation during a difficult five years.

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

Ian Cowie owns shares in BHP Group (BHP) and Royal Dutch Shell (RDSB) as part of a globally diversified portfolio of investment trusts and other shares.