14 investment trusts yielding 4% or more

The number of investment trusts offering at least 4% in annual income has fallen by 25% over the past three months.

Research by stockbroker Stifel, which each quarter crunches the numbers to find the highest-yielding equity trusts, found there are currently 14 trusts offering yields of 4% or higher, down from 19 in May.

The spike in share prices since the Brexit vote was attributed as the main reason behind the decline in dividend yields. While markets were initially rocked by the vote, they have since staged a recovery, with even the FTSE 250 index, which fell 14% in the first two trading sessions following Brexit, managing to claw back its losses.

Of the 14 trusts in the table below, two have already flagged that dividend cuts will take place in the coming months - BlackRock Commodities Income and BlackRock World Mining. Nevertheless, Stifel's analyst Iain Scouller says the yields will still be in excess of 4% following the cuts.

Challenging environment for income seekers

Plenty of UK equity funds feature in the list, including City of London, one of our sister magazine Money Observer's Rated Funds, managed by Job Curtis. The trust has a yield of 4.2% and a good long-term track record with a 50-year record of annual dividend increases.

Scouller is a fan of Merchants, pointing out the discount at 4% is close to its widest level in over a year (discount range of 7% to 5% premium).

The trust mainly focuses on the big blue-chip names in the FTSE 100 index, and makes use of gearing, with leverage typically of 20%.

The analyst also likes Murray Income and Dunedin Income Growth, pointing out that over three and six-month time periods both trusts have beaten the FTSE All-Share index.

It is becoming a more challenging environment for income-seekers, with investors struggling to source income at a sensible price.

In the September issue of Money Observer, on sale from 25 August in WH Smith and various supermarkets, the cover feature will delve into the issue and look at post-Brexit opportunities.

At such times of uncertainty, with the Brexit vote potentially hitting UK company profits further, investment trusts are considered a superior option versus open-ended funds.

The reason is that trusts are not required to distribute all the income generated by their assets every year. They can hold back up to 15% each year, which means they can build up a reserve to bolster dividend payouts in leaner years.

This is why during the financial crisis of 2008-09 the majority of UK equity income investment trusts were able to either maintain or increase their dividends, as they dipped into their reserves. In contrast, the vast majority of UK equity income open-ended funds cut their dividends.

This article was originally published by our sister magazine Money Observer here

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. 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.