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Top UK investment trusts for income

Looking for income? We look at the top yielding investment trusts in UK equities.

 

by Caelainn Barr on Jun 21, 2012 at 05:01

Top UK investment trusts for income

Investment trusts are doing their bit for investors in search for income.

The following table from Oriel Securities shows the trusts investing in UK equities that have a dividend yield above the average available from the FTSE All Share.

Although the rocky stock markets of the past year have seen some trusts lose more from the net asset value (NAV) of their investments than they have given in income, the three-year picture is healthier. The far right column shows the high yielding trusts have delivered capital growth in their investments of between 20% and 40% in the past three years after paying dividends to shareholders.

This investment performance partly explains why shares in most of the trusts are trading at a premium, above NAV. The other reason is the strong investor demand for anything producing a reliable income.

Buying investment trusts on a premium can be risky as it indicates the shares are over valued. However, most of the premiums are in single digits. If you are prepared to suffer a small capital loss in return for a good income some of these trusts could be worth a further look.

Below the table we give more information about the trusts. If you are new to investment trusts and are unsure about terms such as yields and premiums watch The Lolly video guide to investment trusts. 

Fund name Dividend yield (%) Size (£m) Premium/discount (%) 1-year % growth (NAV) 3-year % growth (NAV)
Shires Income 6.6 54 3 -7 31
Henderson High Income 6.6 114 4 -6 28
Merchants 6.5 365 4 -12 26
Schroder Income Growth 5.5 125 -5 -7 20
Dunedin Income Growth 5.0 319 1 -6 32
City of London 4.7 682 5 -3 34
Standard Life Equity Income 4.7 103 -4 -8 21
Value and Income 4.6 79 -19 -8 33
Edinburgh Investment Trust 4.6 930 7 1 40
Murray Income 4.6 408 2 -4 33
JPMorgan Claverhouse 4.6 217 -7 -12 20

Source: Oriel Securities. NAV stands for the net asset value of the trust's investment portfolio. Premium, discounts and NAV calculated without dividends reinvested, debt at fair value and diluted capital to reflect total amount of share warrants and options in circulation.

Unsurprisingly trusts in the UK high income sector come in first place, with Shires Income and Henderson High Income trusts both topping the table, with a dividend yield of 6.6%.

Shires invests primarily in blue chip shares like British American Tobacco (BATS.L) and Royal Dutch Shell (RDSa.L) with a small number of holdings in bonds. The trust is managed by Ed Beal and is currently trading at 182p, a 3% premium above its NAV per share of 178p.

Henderson High Income trust is managed by Alex Crooke and is trading at 126p, a 3.5% premium over its NAV per share of 122p. The NAV of the trust's investment portfolio has grown 27.8% over the past three years with holdings in Vodafone (VOD.L), National Grid (NG.L) and BP (BP.L).

Merchants  is the second highest yielding investment trust at 6.5%. However, Oriel Securities believes the trust ‘looks expensive’ given its one-year NAV has slumped 12% and it trades at a 4% premium above its NAV per share of 341p.

Iain Scouller, head of investment fund research at Oriel Securities, said: ‘Trusts on a premium tend to issue new shares but historically Merchants hasn’t and that may be due to the fact that they’ve got some long-term debt.

‘The premiums reflect supply and demand in the market and if a company isn’t issuing a stock certainly it can move on to a bigger and bigger premium when there’s quite a lot of demand as there is at the moment.’

One of the few high yielding trusts trading at a discount, that is with a share price below the NAV, is the Schroder Income Growth trust. It trades at 182p, 5% below its NAV per share of 193p, and has underperformed the FTSE All Share in the past. Similarly its top holdings are concentrated in blue chip FTSE 100 companies.

The Dunedin Income Growth also yields 5% and trades at 212p, a 1% premium to its NAV per share of 209p. Jeremy Whitley, who also acts as Aberdeen’s head of UK and European equities, manages the trust with top holdings in Centrica (CNA.L), Unilever (ULVR.L) and BHP Billiton (BLT.L).

City of London  shares trade 5% above the NAV per share despite issuing new shares in an effort to curb the premium. Scouller said: ‘City of London has been a fairly active issuer of equity over the last couple of years, typically issuing every couple of weeks.’

The trust has a 45-year record of increasing its dividend and yields 4.7%. It currently trades at 288p, ahead of its NAV per share of 274p.

Standard Life Equity Income  trades at 271p, a discount of 4% to its NAV per share of 281.5p. It yields 4.7% and its top holdings in the FTSE 100 include Rio Tinto (RIO.L) and Imperial Tobacco (IMT.L).

Expensive debt has held back the Value & Income investment trust, which trades at 174p, a whopping 19% discount below its NAV per share of 216p. Its 4.6% yield would be lower if the shares traded closer to NAV.

Scouller explained: ‘Value and Income are on a deep discount as they have some quite expensive long-term debt and the market is worried about its capital structure. I think the annual cost of the debenture [secured loan] is in excess of 10%.’

Neil Woodford’s defensively positioned Edinburgh Investment Trust yields 4.6% even though it trades at 477p, a 7% premium above its NAV per share of 447p.

Richard Scott, manages the Phoenix Hawksmoor Vanbrugh fund, which invests in a range of funds, including investment trusts. He notes that with high premiums on many of the trusts, open-ended funds such as unit trusts should not be overlooked.

‘Some are trading so close to parity or on a small premium that you could choose to invest alternatively in an open-ended fund run by the same manager. The types of trusts we prefer are the ones where we feel there is an edge over an open-ended fund’, he says.

Murray Income  and JP Morgan Claverhouse both have a yield of 4.6%. Charles Luke manages Murray Income which is trading at premium of 2%, with shares priced at 623.5p, to their NAV of 610p.

However, Claverhouse’s discount of 7%, is an example of where investors should look beyond the trust’s yield. Its NAV returns have underperformed on a one, three- and five-year basis and it currently trades at 397p, short of its NAV of 426p.

9 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Jun 21, 2012 at 07:26

I note that the Phoenix Hawksmoor Vanbrugh fund has a TER of 2.57%(?), take that charge out of Investment Trust premiums and then start comparing perhaps?

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HEDDERS

Jun 21, 2012 at 08:30

What about British Assets

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Anonymous 2 needed this 'off the record'

Jun 21, 2012 at 09:15

Very confusing.

When you click on the link in the article for Merchants Triust it says that the NAV is 395 and that the Trust iprice is at a discount of 6.8%

Which is correct?

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sgjhaghsdg

Jun 21, 2012 at 09:25

Some sources use the latest announced NAV and some use an estimated NAV. You also need to look carefully at recent dividend payments: some ITs don't pay dividends in equal amounts 2/4 times a year, and if they have recently "rebalanced", you can see dividend spikes. As with everything DYOR!

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pat59ron

Jun 21, 2012 at 09:44

Why doesn't City Merchants High Yield (7.3%) figure?

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Podney

Jun 21, 2012 at 17:15

Not much mention of those that have achieved a consistently rising income,which is what a lot of retired investors should be looking for.

Any suggestions??

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sgjhaghsdg

Jun 21, 2012 at 18:04

The Motley Fool forums has a Unit and Investment trust board. There are many there who've been using ITs for decades and seem to thrive on analysing their performance in great detail.

It's a shame the board software sucks, but you can't have everything!

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Hilary hames

Jun 21, 2012 at 22:04

useful but not sure which best to buy if was chosing, already have Edinburgh.

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Caelainn Barr (Citywire)

Jun 22, 2012 at 08:52

Hi Podney,

We published an article on trusts with the longest record of increasing dividends last month. Hope that helps!

http://citywire.co.uk/money/investment-trusts-10-great-dividend-growers/a590155

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  • Phoenix Hawksmoor Vanbrugh A Inc
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  • British American Tobacco PLC (BATS.L)
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  • Royal Dutch Shell PLC (RDSa.L)
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  • Vodafone Group PLC (VOD.L)
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  • National Grid PLC (NG.L)
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  • BP PLC (BP.L)
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  • Centrica PLC (CNA.L)
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  • Unilever PLC (ULVR.L)
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  • Bhp Billiton PLC (BLT.L)
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  • Rio Tinto PLC (RIO.L)
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  • Imperial Tobacco Group PLC (IMT.L)
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  • Henderson High Income Trust PLC (HHI.L)
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Look up the investment trusts

  • Shires Income (Ordinary Share)
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  • Merchants Trust (Ordinary Share)
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  • Schroder Income Growth (Ordinary Share)
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  • Dunedin Income Growth (Ordinary Share)
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  • Standard Life Equity Income (Ordinary Share)
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  • Value & Income (Ordinary Share)
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  • Edinburgh Investment (Ordinary Share)
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  • Murray Income Trust (Ordinary Share)
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  • JPMorgan Claverhouse (Ordinary Share)
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  • Jeremy Whitley
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  • Neil Woodford
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  • Charles Luke
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