10 investment trust dividend eye-catchers
Encouraged by the performance of income trusts we’ve previously highlighted, most of which maintained dividends during last year’s pandemic crisis, we present a list of 10 ‘dividend eye-catchers’.
With the discounts on many higher-yielding investment trusts narrowing as their shares advance in the ‘vaccine rally’, we have scoured the market for closed-end funds that still look undervalued and offer above-average yields.
Although several of the trusts highlighted are ‘special situations’, they have all done something surprising to make them stand out and hopefully deliver reliable income to shareholders.
The 10 trusts cover a range of asset classes, from property to ships to debt and, of course, stocks paying good dividends.
Surprise, surprise! It’s over two years since we profiled the attractive dividend growth story at rising giant Law Debenture (LWDB) in issue 50, and used the occasion to pick five more ‘challengers’ in the UK Equity Income investment trust sector and, in a separate feature, highlight five other ’income bargains’ mostly trading on discounts to their net asset values (NAV).
We take income investing very seriously at Investment Trust Insider, so in issue 54 at the height of last year’s dividend drought caused by the pandemic crisis, we also looked at ’10 Dividend Survivors’ whose income prospects continued to look strong.
Happily all five income ‘challengers’ we chose – Lowland (LWI), Aberdeen Standard Equity Income (ASEI), JPMorgan Claverhouse (JCH), Finsbury Growth & Income (FGT) and Chelverton UK Dividend (SDV) – got through 2020 with their dividends intact, even if their share prices took a pasting over a year ago.
It was a slightly more mixed outcome for our five ‘bargains’, which included Law Debenture. It, along with real estate investment trust Civitas Social Housing (CSH) and debt funds VSL Speciality Investments (VSL) and BioPharma Credit (BPCR), also avoided dividend cuts and provided good levels of income, as well as a rebound in capital growth throughout the period. But Midlands-focused Real Estate Investors (RLE) had a more challenging time and cut its dividends.
Our list of ’10 Dividend Survivors’ – which again included Nick Train’s Finsbury Growth & Income, Law Debenture and JPMorgan Claverhouse alongside Dunedin Income Growth (DIG), Diverse Income (DIVI), City of London (CTY), BMO Capital & Income (BCI), Schroder Income Growth (SCF), Troy Income & Growth (TIGT) and Edinburgh (EDIN) – still offer solid prospects for good income and total returns after the Covid recovery, although the last two did subsequently follow Temple Bar (TMPL) in cutting dividends as we said they were likely to at the time.
It’s clear the world income investors inhabit today is very different to 2019 or 2020. Although many companies have resumed dividends after suspending or cutting payouts last year, there remains uncertainty around the sustainability of income from businesses on the wrong side of climate change and digitisation.
Investment trusts’ ability to build up revenue reserves to support dividends when investment income is falling is a massive advantage for income-seekers. However, it is reflected in the shares of many income closed-end funds, which today stand on much tighter discounts and even command premiums above their underlying net asset values.
Faced by this welcome development, here is a new list of eye-catching high-yielding bargains. The 10 trusts are generally trading on discounts and are doing something a little different to deliver hopefully reliable income streams.
This comparatively small £150m real estate investment trust, managed by Alex Short (pictured) and Laura Elkin, has punched above its weight, bucking the trend of dividend cuts by bigger, better-known property funds during last year’s lockdowns. In addition to maintaining payouts, it successfully sued two of its largest tenants, Sports Direct and Mecca Bingo, which it believed could afford to pay some rent and recently won a court order for the full amount of rent arrears of £1.2m.
On a 5% discount and a high 8.5% dividend yield, the shares look attractive. Although the backdated rent still leaves its quarterly dividends uncovered by earnings, or income the trust receives, Liberum, the company’s broker, predicts AEWU will achieve full dividend cover in the next three years as Short reinvests cash from recent property disposals.
To the annoyance of some shareholders in this Guernsey investment company, the £107m real estate debt fund took the surprise decision to wind up last November, a move approved by a majority of investors in January. Despite a good eight-year record with a fully-covered dividend during last year’s turmoil, the board, chaired by Jack Perry, concluded LBOW was too small to have a comfortable long-term future.
On a 12% discount and 6.9% yield, the shares should offer a good total return as the portfolio of nine secured loans to property developers returns shareholders’ money as the debts are repaid over two-and-a-half years. However, this isn’t a conventional income play as the quarterly dividends will decline as the asset base and loans shrink with no new investments being made.
‘The company enters the realisation period in a position of strength; its financial position and liquidity remains robust and it is well-placed to address any second-order impacts of the Covid-19 pandemic, should they arise,’ said Perry.
The real estate theme continues with this ‘floating property’ fund, as shareholder Hawksmoor Investment Management recently described the £214m Guernsey investment company, which owns a fleet of 17 tankers and bulk carriers it charters to shipping companies.
SHIP, a dollar-denominated specialist income fund, impressed investors in January by lifting its dividend target to 7.5 cents from 7 cents a share and, with dividends included, reported a 9.3% increase in net asset value (NAV) in the second half of last year. NAV has continued to advance as the company benefits from a surge in charter rates as world trade accelerates after the disruption of Covid-19. Fund managers Andrew Hampson and Paulo Almeida have also proved adept at selling carriers and tankers into a buoyant market and re-investing in cheaper ships.
On a 6% premium to estimated NAV per share of $1.05, the shares at $1.12 are not cheap but their 6.7% yield is high and, as Stifel analysts noted last month, they offer some protection against rising inflation.
Moving away from real estate but sticking with debt, we turn to a £200m investor in complex bundles of highly leveraged corporate debt known as collateralised loan obligations (CLO). Structured finance funds like Fair Oaks plunged in the pandemic crash as they cut or suspended dividends and investors assumed the Covid-19 blow to the US and European economies would lead to a surge in defaults.
The big surprise of last year was how companies continued to service their debts, helped by shareholders and government relief programmes. Fair Oaks saw net asset value nearly double in the 12 months after the market lows in March 2020 and with its last two quarterly dividends offering a mouth-watering yield of 13%, leading shareholders rolled over their stakes in a corporate reorganisation in April.
Numis Securities, the company’s joint broker, says Fair Oaks fund managers have proved skilled at shifting between the equity and debt of CLOs to generate shareholder returns. However, they caution this is a volatile area and the shares are only suitable for investors with a high risk tolerance.
The surprise from Apax Global Alpha has been the sight of two large institutional investors, Australia’s sovereign wealth fund and US private equity specialist Lexington Partners, bailing out of the £958m investment company this year. Trust pickers Andrew Bell (pictured) and James Hart at Witan (WTAN) provide some reassurance as they retain 2.8% of their £2.2bn global portfolio in APAX. The company offers exclusive access to the Apax range of private equity funds and through those exposure to growth in technology, consumer internet, business services and healthcare.
The exit of these big investors helped deflate APAX shares during the recent tech sell-off. They trail on a 13% discount below net asset value, down from a 1% premium in March. This offers a good entry point for investors impressed by the company’s 15% average annual investment return in the past five years from the equity and debt of unquoted companies. APAX pays out 5% of its NAV in semi-annual dividends and yields just over 5%.
‘We view the current 12% discount to NAV as attractive for a fund that has delivered impressive NAV performance and that was recently trading on a small premium,’ Liberum analyst Conor Finn said in May.
The £850m infrastructure debt fund has had a difficult 18 months. The power price falls we examined in our first feature of this issue combined with rising corporation tax, various issues at its biomass, social housing and solar power investments and a cut in its annual dividend target to 7p from 7.6p combined to knock a third off the shares from their 133p peak in January last year. This leaves them standing at a 4% discount to net asset value, a de-rating that reflects concern at the decline in the NAV – down 3.1% (with dividends excluded) in the six months to 31 March following a 6.9% fall in the previous year.
In its defence the Jersey investment company, managed by Philip Kent at Gravis, highlighted the ‘materially different and more conservative’ valuation assumptions it uses compared to its rivals. The disclosure impressed some analysts with Numis Securities believing the 7% yield should support the shares going forward. Chris Brown of JPMorgan Cazenove noted: ‘Were GCP to make the most aggressive assumptions in the market, its NAV would be 11.7% higher.’ However, Investec and Jefferies rated GCP a ‘sell’ and ‘underperform’ pointing out dividend cover remained thin.
Turning to equities, this £115m trust springs a double surprise. Firstly, it's the UK’s only listed fund focused on Canada, a stock market packed with large, high-yielding companies. Secondly, the portfolio managed by Dean Orrico and Rob Lauzon at Toronto-based Middlefield Group, combines investments in Canadian real estate, financials and oil pipelines alongside renewable energy providers, all on a 15% discount and a 4.7% dividend yield.
Although MCT’s long-term performance has not matched US-focused investment trusts with which it is often bracketed, net asset value has nearly doubled in 10 years with the shares up 42% in the past year with the quarterly dividends included. Orrico is positive on the outlook as higher-yielding ‘value’ stocks continue to do well and the Canadian economy reopens. ‘As at 30 May, Canada had administered at least one vaccine dose to almost 60% of its population, representing the second highest rate among G7 nations,’ he said.
The switch from growth to defensive income is also boosting the largest and highest-yielding global equity income trust after recent years of underperformance in the tech-led bull market. Bruce Stout, the cautious, Asia-focused Aberdeen Standard fund manager who has run the £1.5bn closed-end fund for 17 years, revealed in the last annual report he was using limited amounts of option writing and stock lending to top up investment income. Earnings fell 14% last year, but the board was able to lift dividends by 1.9% for the 16th consecutive year by drawing on its revenue reserves.
The shares have shed their small discount in the value rally and stand close to ‘par’ or net asset value but arguably still offer value with a 4.5% dividend yield and a diversified portfolio that is very different to the UK income trusts many investors hold. With dividends included the shares are up 31% in the past year, ahead of the MSCI World index, although over 10 years the trust’s 100% total return is less than half the index.
The big surprise from this investment trust was that over 21% of shares were tendered in its five-year exit opportunity in February, far higher than the 4% who sold out in 2016. The exodus reflected uncertainty for the sub-emerging market countries fund managers Sam Vecht and Emily Fletcher (pictured) focus on, at a time when the recovery in the global economy from Covid-19 offers more mainstream opportunities. Five-year returns were also hit by a painful pandemic crash in the first quarter of last year.
Nevertheless, the trust remains sizeable at £231m and half-year results this month showed it had made a full recovery with a 37% jump in the dollar NAV in the six months to 31 March, double the gain in its stock market benchmark. With the shares on a 5% discount and yielding over 4%, they remain a good way to access the recovery in Saudi Arabia, Indonesia, Thailand and Vietnam, which the managers argue remain undervalued compared to developed markets, although they acknowledge the outlook for these countries will be volatile as the battle against coronavirus continues.
Closer to home, this £85m equity and bond income fund – the smallest of Aberdeen Standard’s four equity income trusts – has achieved a remarkable result with investment income dropping just 5% in the year to 31 March when widespread dividend cuts saw revenues at UK trusts slump three or four times that. The resilience in income reflects the 27% fund manager Ian Pyle holds in long-dated, fixed income preference shares. Alongside more conventional blue chips AstraZeneca, BHP, Prudential and Rio Tinto is an 11% allocation to Abby Glennie’s Aberdeen Smaller Companies Income (ASCI).
The trust’s board held annual dividends at 13.2p per share, dipping into revenue reserves which even after the payment provide around a year’s cover. That hasn’t gone unnoticed with the shares moving to ‘par’ from an average one-year discount of 5%. They still offer a high 4.8% dividend yield though.
