Income-seeking investors should consider investment trusts to boost their income and capital returns, as new research shows an elite group of trusts yield up to 10% on a 10-year basis.

A select group of investment trusts have been given ‘Dividend Hero’ status, denoting those that have generated dividend increases every year for 10 consecutive years or more.

However, looking at the trusts’ current dividend yield as a snapshot based on the current price is not a true reflection of the actual yield an individual investor is receiving. For that you have to look at the current yield compared to the price when the investor purchased the investment trust.

In this analysis we have compared the current yield to the share price of each trust 10 years ago to look at the yield investors would now be getting, in addition to the total return they would have received over that time.

WHO COMES TOP?

British & American Investment Trust (BAF), which was launched in 1996, has raised its dividend every year for the past 22 years. It tops the table for current yield based on the price investors could buy it at 10 years ago – yielding 10.4%.

This trust is the only one whose share price has actually fallen during that 10-year period, which will have enhanced the 10-year yield figure. Even with this share price fall, the effect of dividends over the past decade means investors selling today who had reinvested dividends would still be up more than 139% over that period on a total return basis.

Of the list of 42 Dividend Hero trusts, 21 are yielding 6% or more, based on buying the trust 10 years ago, while 12 are yielding 7% or more.

Some of the examples paint a compelling picture for investors. For example, Schroder Oriental Income (SOI) would have turned £10,000 into £39,000 over the past 10 years with dividends reinvested and today would be generating a growing annual income of £900.

Henderson Smaller Companies (HSL) has delivered one of the highest total returns, turning £10,000 into £51,700 and would be generating an annual income today of £790.

DIVIDEND REINVESTMENT ANGLE

The total return figures also highlight the benefit of reinvesting dividends for buy-and-hold investors who are not reliant on the income now. These figures look at the return you’d have seen over 10 years if you’d reinvested your dividends back into the investment trust, and so benefited from the power of compounding.

Investment trusts focused on smaller companies delivered the largest total returns, led by BlackRock Smaller Companies (BRSC), at 481% return over the 10 years; followed by BlackRock Throgmorton (THRG) at 479%, Standard Life UK Smaller Companies (SLS) at 431% and Henderson Smaller Companies         at 417%.

Perennial favourites among investment trust fans also get a high showing, with Baillie Gifford’s Scottish Mortgage Investment Trust (SMT) returning 438% over the 10 years on a total return basis, while Witan (WTAN) has returned 248%. Caledonia Investments (CLDN) is one of the highest yielding based on the 2008 price, at 8.6%, while City of London (CTY) is yielding 7.1% on the same basis.

What makes the trusts more compelling is their proven ability to increase these payouts each year. For example, City of London is yielding 7.1% based on 2008’s price, coupled with a 51-year track record of increasing its payout, or Caledonia’s 8.6% 10-year yield, with 50 years of increased dividends.

STEADY INCOME BENEFITS

Investment trusts are particularly suited to providing steady income for investors, as their structure enables them to withhold up to 15% of the income they receive each year in order to be used in future years to bolster dividends when income generated from their portfolio may be lower.

The longer-term nature of the closed-end structure of investment trusts means that managers can also invest for the long-term and ride out market volatility, without being forced to sell by investor redemptions.

However, the figures show that investors often have to decide between jam today and jam tomorrow, with income often coming at the price of lower capital growth, or vice versa. With the example of British & American, investors would be seeing a solid dividend yield today, but would have sacrificed capital growth over that period.

Conversely, some of the lower yielding trusts based on the investor buying in 2008 have delivered some of the highest total returns. Examples include Scottish Mortgage, which is only yielding 2.4% but has delivered one of the highest total returns at 438% and F&C Global Smaller Companies (FCS), which is yielding 3.4% but has a 10-year total return of 336%.

That said, even the lowest yielding trusts have proven their ability to hand investors a reliable and growing income each year for at least 10 years, making them particularly attractive for those using the pension freedoms in retirement relying on the income to fund their lifestyle.

If savvy investors had put their money in the top 10 trusts by total return, over the past 10 years would have grown £100,000 into more than £456,000 and would be generating £5,370 income currently.

Meanwhile, a portfolio evenly split between the top 10 trusts based on current yield would have turned £100,000 into just over £280,000 but would be paying out current income of £8,130.

Laura Suter, personal finance analyst, AJ Bell

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