Whilst UK inflation cooled more than expected last month, June’s 7.9% reading remains far higher than the Bank of England’s 2% target and prices are still going up, which means investors still need to protect portfolios from the ‘cruellest tax’ with dividends being part of the toolkit.

In some welcome news for income-hungry investors, analysis published by Stifel today reveals there are currently 35 investment trusts, investing primarily in shares, with a dividend yield of 4% or higher.

Furthermore, the number of high yielders has increased since the broker last researched this topic in February.

Back then, there were 25 high yielders and the increase reflects some dividend growth as well as the impact of falling share prices in the case of some trusts, which have pushed up yields.

ATTRACTIVE YIELDS

‘For those investors prepared to take equity risk, we think the yields on these trusts are relatively attractive,’ says Stifel.

‘The majority of these trusts offer exposure to overseas markets as an alternative to the UK’, and the majority of them ‘also have dividend reserves, and have a good record of delivering annual dividend growth.’

MEET THE HIGH YIELDERS

The broker highlights a diverse band of trusts offering yields of at least 4% which includes UK equity income stalwarts, some Asia-focused trusts and a few sector specialists.

Top of the table is Henderson Far East Income (HFEL), the Mike Kerley-managed trust offering a 10.1% yield whose attractions Shares has previously highlighted, followed by European Assets (EAT) and abrdn Equity Income (AEI) on 7.5% apiece.

Hot on their heels are the likes of BlackRock World Mining (BRWM) and Henderson High Income (HHI) on 6.6% and 6.3% respectively, followed by TR Property (TRY) with a plump payout of 5.8%.

Long-established UK equity income funds also feature in the top 20 such as Lowland (LWI), Merchants Trust (MRCH), JPMorgan Claverhouse (JCH) and City of London (CTY), all offering juicy yields above 5%.

BUT BEWARE OF AUTOMATIC CUTS

However, Stifel also highlights the risk around 10 trusts that pay out a fixed percentage of their NAV each year as dividends, names which are italicised in the table provided.

‘Typically this is around 4% of NAV and at times when NAVs fall, such as for some trusts last year, the dividends will automatically be cut,’ warns the broker.

Trusts that look vulnerable include the aforementioned European Assets as well as BlackRock Latin American (BRLA), JPMorgan China Growth & Income (JCGI), Invesco Asia (IAT) and Montanaro UK Smaller Companies (MTU).

‘Investors need to be aware that in years when the NAVs on these trusts fall, the total dividend paid and the prospective yield in the following year are also likely to decline, as we have seen in several cases in the past year or two’, continues the broker.

Stifel warns the dividend may be reduced in the year ahead at Evy Hambro-managed BlackRock World Mining, which trades on a 6.6% yield but pays out all its income as dividends. ‘Therefore, the dividend may be reduced at times when the underlying mining companies cut their dividends’, cautions Stifel.

‘We would not be surprised to see a lower dividend paid in the current year to 31 December 2023, compared with the 40p paid in the past year to 31 December 2022. However, it seems reasonable to expect that even if the dividend is reduced, the dividend yield would remain in excess of 4%.’

The broker also points out that a number of these trusts paying out a fixed percentage of NAV are also ‘manufacturing’ yield through this process.

‘This is because a few of them are paying dividends which are at a level higher than the trust receives in its revenue EPS (earnings per share). Therefore, they are funding the revenue shortfall by paying out of their capital, i.e. from the NAV. An example of a trust doing this is Montanaro UK Smaller Companies, which has a 4.5% historical dividend yield.’

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