These high dividend investment trusts yield more than the FTSE 100

High dividend investment trusts

Investment trusts are publicly-traded companies that own a portfolio of stocks. You can buy investment trusts in the same way that you would buy a normal share, through your broker. They can be a fantastic way to boost your diversification, especially if you’re just starting out and don’t have enough capital to properly diversify your portfolio.

There are many different investment trusts listed in the UK. They all have different investment strategies. While some focus on blue-chip FTSE 100 stocks, others focus on niche areas such as technology or the emerging markets. There are also quite a few dividend-focused trusts that pay their investors big dividends on a quarterly basis. Today, I’m profiling two such dividend investment trusts. Both currently yield considerably more than the FTSE 100 index.

Merchants Trust (LON: MRCH)

Managed by Allianz Global Investors, this dividend investment trust has been around since 1889. It’s goal is to provide ‘above-average’ income, as well as income growth and long-term capital growth. It mainly invests in high-yield FTSE 100 stocks.

At the end of October, the trust’s five largest holdings were:

go to link Royal Dutch Shell B 8.2%
GlaxoSmithKline 5.9%
BP 5.8%
HSBC 4.7%
Lloyds Banking Group 3.9%

Looking at those stocks, you can see the trust is definitely investing with a high-yield approach. Portfolio Manager Simon Gergel says: “Income is our focus. We are income seekers and we make no apology for buying shares that provide the high yield we require. It’s why so many private investors hold the trust.

So what kind of yield does this investment trust pay?

For 2017, the trust paid dividends of 24.2p per share. At the current share price of 479p, that’s a yield of 5.1%. Not bad at all.

Merchants Trust has increased its dividend payout for 35 consecutive years now. That’s some achievement. However, growth has been rather slow in recent years. Over the last five years, the dividend has only been increased a total of 5.2%. That’s an underwhelming level of growth. Yet, looking at the trust’s holdings, it’s not surprising either. Shell, Glaxo, BP and HSBC have ALL frozen their dividends in recent years.

The trust pays its dividends quarterly, which is handy for those who rely on their dividends for income.

In terms of capital growth, over the five years to the end of October, the trust’s share price rose 70%. Its NAV increased 61% in this time.

The trust currently trades at a 5.9% discount to the NAV. Its ongoing charge is just 0.63%.

Overall, the Merchants trust looks to be a good investment trust for those seeking high income, who aren’t too concerned about dividend growth.

Murray Income Trust (LON: MUT)

The Murray Income Trust is another investment trust that is popular amongst dividend investors. It’s run by Aberdeen Asset Management and was founded in 1923. It aims to achieve a high and growing income, with capital growth too. This trust mainly invests in UK equities, with a small allocation to international equities.

At 31 October, the top five holdings were:

Unilever 4.6%
British American Tobacco 4.1%
AstraZeneca 4.0%
Prudential 3.8%
GlaxoSmithKline 3.7%

You can see that this trust takes a slightly different approach to dividend investing than the Merchants Trust. There’s less of a focus on high-yield stocks, and more of a focus on dividend growth stocks. Probably a better strategy in the long run in my view.

The dividend for 2017 is 32.75p per share, a yield of 4.2% at the current share price.

Like the Merchants Trust, Murray’s dividend growth history is excellent. It has notched up 43 consecutive dividend increases now. Dividend growth over the last five years has been 9.9%, almost twice the pace of Merchant’s growth. Dividends are also paid on a quarterly basis.

In capital appreciation terms, this trust has underperformed the Merchants Trust, returning only 45% over five years to the end of October. Its NAV increased 60%.

The trust currently trades at a 7.2% discount to the NAV.  The ongoing charge is 0.76%.

Overall, this looks to be a good investment trust for those seeking a robust dividend yield, with dividend growth roughly in line with inflation.

Disclosure: Edward Sheldon, CFA owns shares in Royal Dutch Shell, GlaxoSmithKline and Lloyds Banking Group. 

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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