Seven income trusts for high yields & growing dividends

Income opportunities

In their latest report Peel Hunt investment company analysts Anthony Leatham and Priyan Rayatt have focused on income. They have picked out good seven good value stock market listed funds they believe will generate attractive dividends from equities and ‘alternative’ assets, with some offering a prospect of capital growth as their shares recover from a difficult 2018.

None of the companies in this gallery are Peel Hunt corporate broking clients. Click on the fact sheet links for more information.

Next: Murray International

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Murray International (MYI)

Performance of the £1.5 billion global equity income trust has been mixed in the past five years but the Peel Hunt analysts like the low turnover, high conviction stock picking of fund manager Bruce Stout (pictured).

In particular Stout’s focus on Asia and emerging markets where he believes the most compelling opportunities exist, reassures analysts Anthony Leatham and Priyan Rayatt who say that as the ‘US equity outlook becomes less certain, correlations may once again breakdown in Murray International’s favour’.

The trust’s 30% and 18% exposure to Asia and emerging markets make it stand out from its rivals, which on average have just 12% in these markets. While this can drag on returns, the analysts note that over three years its underlying growth in net asset value (NAV) beats its benchmark.

Gearing – or borrowing – of 11% is invested in emerging market debt, which while it can bring extra currency risk and volatility, also enables Stout to access stocks with good income and growth prospects.

At 4.4% Murray International (MYI) has the highest yield in its sector with dividends backed by a strong track record of growth of 9% compound a year. Last year’s pay-outs were covered by earnings and in addition there is enough revenue in reserve to meet one year’s worth of dividends.

Next: Aberdeen Standard Equity Income

Aberdeen Standard Equity Income (ASEI)

Turning to the UK, the Peel Hunt analysts have chosen this £200 million ‘multi-cap’ trust run by fund manager Thomas Moore (pictured) as another potential diversifier for equity income investors.

Moore’s overall record is impressive, with underlying growth in the portfolio of large, medium-sized and smaller companies beating the FTSE All-Share by an average of 3.5% a year since he took charge in 2011.

The period since the June 2016 European referendum has been tough, however. With two thirds of the 69-stock portfolio outside the FTSE 100, Aberdeen Standard Equity Income (ASEI) has suffered from investors marking down UK domestic stocks in favour of blue chip multinationals before Brexit.

One way or another Brexit will pass and the analysts report Moore’s belief that ‘the UK market is mid-cycle not end-cycle and therefore there is significant scope for a recoupling of dividends and share prices’ once the political and economic uncertainty is removed.

A yield of 4.7% with dividends covered by earnings and nearly a year’s worth of revenue reserves convince Leatham and Rayatt that a turnaround is on the cards.

‘Year-to-date net asset value is up strongly [7%] and the shares are struggling to keep pace on a 4% discount and we see potential for upside surprise from here,’ the Peel Hunt pair said.

Next: European Assets Trust

European Assets Trust (EAT)

Europe sold off heavily last year over fears of slowing global growth. One of the biggest losers was this £357 million European smaller companies trust run by Sam Cosh at BMO Global Asset Management. Its shares slumped 23.5%, although the underlying decline of 15.5% was not as bad and only marginally worse than its benchmark.

The swing in sentiment was not helped by EAT’s dividend policy which distributes 6% of net assets each year. While this produces a high yield, pay-outs are variable: last year’s decline in net asset value meant the dividend was recently cut with the shares slipping to a 7% discount to NAV in response.

‘This distribution out of capital allows European Assets [EAT] to deliver an attractive but not progressive dividend, while affording the manager the flexibility to be unconstrained in his stock selection,’ said the analysts, noting that Cosh does not have to buy dividend stocks to generate an income.

Like other analysts, the Peel Hunt pair believe EAT’s move from Euronext to a premium listing on the London Stock Exchange next month could trigger a revival as index-tracking funds buy into the shares.

‘Our thesis is based on our conviction in the manager, his intuitive investment style and an exciting portfolio which was oversold in the risk aversion of the second half of 2018,’ they said.

Next: BlackRock World Mining

BlackRock World Mining (BRWM)

Having cut its dividend two years ago and with commodities buffeted by the US-China trade war and global slowdown, this £600 million trust run by Evy Hambro (pictured) and Olivia Markam is perhaps not an immediately attractive income play.

However, the 14% discount on BlackRock World Mining (BRWM) means the shares are cheap, particularly as the Peel Hunt analysts agree with the fund managers that investors have become too bearish. They say the mining sector continues to benefit from a more prudent focus on shareholder returns, with the emphasis on profits rather than digging more copper, iron ore and other metals out of the ground.

They say the fully covered yield of 4.5% is underpinned by a sector expected to deliver another year of ‘positive underlying dividend growth and [share] buyback activity, supported by strong balance sheets’, said the analysts.

In addition, the trust’s 12% weighting in BHP Billiton will see it get a slug of the $5.2 billion special dividend the diversified miner is paying following the disposal of its US onshore assets.

‘The manager is cautiously optimistic and sees an environment where trade talks progress, infrastructure spend increases, and the US adopts a more dovish stance, leading to US dollar weakness, paving the way for emerging market and commodity strength,’ said Leatham and Rayatt.

Next: Sequoia Economic Infrastructure Income

Sequoia Economic Infrastructure Income (SEQI)

Moving on to investment companies focused on less traditional sources of income, the Peel Hunt analysts plump for this £1.2 billion infrastructure fund.

Unlike the better known social infrastructure funds, which invest in the shares of largely UK-based public sector projects running roads, hospitals and garrisons, Sequoia Economic Infrastructure Income (SEQI) takes a global approach to the same sector, investing largely outside the UK where it holds lower-risk bonds issued by similar infrastructure companies.

And unlike the equity income trusts, the shares are highly rated, trading 11% over their net asset value. Although dear Peel Hunt says the shares are worth keeping an eye on in case the premium moderates, particularly as they offer a lofty 8.8% yield, although the underlying dividends may not grow every year.

‘Sequoia mitigates the higher risk nature of demand-based cash-flows by investing in the debt tranches of less leveraged structures.

‘The trust is our favoured infrastructure play, has one of the highest yields in the sector, and although it currently trades near the top of its 12-month premium range, we would certainly advocate picking up stock on single-digit premiums,’ said the analysts.

Next: BioPharma Credit

BioPharma Credit (BPCR)

Launched two years ago, this £1.4 billion investment company is unique in London for its focus on loans to pharmaceutical companies secured on sales of approved drugs, mostly in the US.

Its all-income, no-growth approach has appealed to investors especially as it is not linked to the economy and the company does not use borrowing, or leverage, to juice up returns. In reflection of this demand, the shares trade on a 6% premium to NAV.

A recent $305 million share issue and $370 loan repayment from Tesaro after its takeover by the UK’s GlaxoSmithKline has left Biopharma Credit (BPCR) with a big cash pile to reinvest over the next 12 months in support of its 7% dividend target.

‘The team expects to deploy the balance over the next 12 months, and will continue to deliver the target seven cent dividend per annum,’ the analysts said.

Next: SQN Asset Finance

SQN Asset Finance (SQN)

Unlike the previous two debt funds, shares in this £340 million secured lender to businesses trade at a small 1% discount to their net asset value (NAV).

This reflects a difficult 2017-18 when the shares de-rated and fell to a 17% discount after the company was forced to restructure several of its loans and investors worried about their dividends.

‘These assets are revenue-producing or cost saving pieces of equipment and typically have a high in-place value, long economic lives and multiple industry applications,’ explained Leatham.

With most of the problem loans sorted out, the shares have recoverd and the high 9.7% dividend yield of SQN Asset Finance (SQN) is almost covered by interest paid by borrowers. Prospects are further improved by the likely merger of its two share classes this year.

‘We have a positive outlook for the dividend and its cover, supported by the merging of the C-shares and ordinary shares expected later this year,’ the analysts said.