Back equity income in the Year of Yield: Trusts paying top dividends

Even those usually inclined to support Britain can currently find reasons to avoid the UK stock market. The fall statement exposed the challenges facing the economy that have led global investors to turn bearish on UK equities.

As a result of this discontent, the value of the Paris stock market, with its preponderance of luxury goods giants, is ahead of London in some respects.

Companies like Louis Vuitton Moet Hennessy, with brands like Tiffany and Tag Heuer, are considered more resilient in times of downturn than, say, Unilever, home of the more prosaic Dove, Domestos and Magnum ice creams.

But there are also reasons to take a contrary stance – if you want to bolster the recovery potential with less glamorous names like AstraZeneca, Barclays and the aforementioned Unilever. UK equity income trusts, several of which were established in the Victorian era of thrift, are one way to bet on such companies.

These trusts can provide ballast for a portfolio – and provide an income stream currently fueled by the profits from the overseas operations of FTSE 100 participants. There is so much emphasis on income that 2023 has already been declared “The Year of Yield.”

The UK equity income sector is less boring than it sounds.

Some trusts’ defense, energy and tobacco holdings are at the center of a debate over what constitutes an ethical investment. There’s also the opportunity to grab a bargain: Abrdn Equity Income Trust is taking a 10 percent discount off the net worth of its assets. Murray Income is discounted by 7 percent. But a reassessment of the sector may be underway as the focus turns to the dividends offered by FTSE 100 members.

Broker AJ Bell says these companies have announced £81.5bn in payouts this year, with a further £50.3bn in share buybacks. Darius McDermott, of Fund Caliber, comments: ‘The UK remains one of the best places in the world for dividends – our stock market has a 4% yield.’

The UK equity income trust range includes City of London, founded in 1861 and analysts’ favorite for 2022 and beyond.

The trust’s performance — which has a return of 5.1 percent and a premium of 1.68 percent — was driven by Big Tobacco and Big Oil in its portfolio. BAE, the UK’s largest defense firm, is another contentious interest, although the war in Ukraine has increased support for the idea that guns protect democracy.

Schroder Income Growth, with a return of 4.58 percent, is also favored by analysts. This trust, with a discount of 1.68 percent, also owns Big Oil.

Murray Income, with a return of 4.39 percent, has a mix of mining and energy and owns AstraZeneca, Diageo and Unilever. City of London, Schroder Income Growth and Murray are among the dividend heroes of the Association of Investment Companies, which have increased their payouts for more than 20 years. Also on the list are Merchants Trust, with a premium of 2.5 percent and a return of 4.95 percent, and Abrdn Equity Income, with a return of 6.82 percent.

It’s also worth noting that the Ruffer defensive trust, where I’m an investor, currently assigns the highest weight to “cash or cash-like assets” in its history. Ruffer’s executives say “one of the greatest benefits of cash is that it gives you the ability to act quickly and seize opportunities.” To me, some of these opportunities appear to lie in a spread of UK equity income trusts.