Peel Hunt research analysts believe investors looking for income should take a punt on JP Morgan’s premium-rated Global Growth & Income (JGGI ) and UK-focused Law Debenture (LWDB ).

In the 2024 income playbook, the team highlights 10 funds with growing dividends that are fully covered, or close to as it concentrates on ‘robust fundamentals’. This is a shift from last year’s picks which were chosen if they yielded a ‘significant amount’ of income as part of an ‘attractive total return’.

Equity Income

JGGI has been a strong performer in recent years, including during positive periods for both ‘growth’ and ‘value’ styles, under managers Helge Skibeli, James Cook and Tim Woodhouse.

The £2.1bn trust’s dividend policy is based on 4% of net asset value as at the beginning of each financial year, with the current payout of 18.44p per share an 8.5% increase on last year’s and representing a 3.7% yield. 

The dividends are supplemented by payments from capital reserves, meaning the managers are unconstrained by an income requirement. Currently, the portfolio is positioned towards high-growth cyclicals, such as silicon companies, and low-growth defensive companies such as Chicago Metal Exchange.

The shares have traded at a premium in recent years, meaning the board has been able to issue shares and grow the trust. It has also merged with Scottish Investment Trust (SCIN) and JPMorgan Elect (JPE) to swell assets. 

Law Debenture

UK equity income trust Law Debenture has a 44-year track record of increasing or maintaining dividends, the Peel Hunt analysts said about their corporate client.

Janus Henderson managers James Henderson and Laura Foll have an all-cap focus across the £1bn portfolio, while wholly owned business Independent Professional Services (IPS), which makes up 20% of assets, provides uncorrelated cash generation and steady growth.

The business comprises pensions, corporate trusts and corporate services and grew its revenues 11.2% for the year to July 2023. IPS has funded 34% of dividends over the last decade, with about two-thirds of its recurring revenue coming from ongoing contractual commitments.

The overall portfolio’s largest sector exposure is financials, which makes up 27% of assets, with industrials constituting a quarter. Rolls Royce (RR), Shell (SHEL) and BP (BP) are the largest individual bets at respective weightings of 3.7%, 3.5% and 3%. 

The managers are bullish about the UK’s prospects given the low valuations on offer, while Peel Hunt believes the portfolio is positively geared towards an improving economic backdrop and expects Foll and Henderson to make full use of the flexibility afforded by IPS income generation.

Japan 

The £240m CC Japan Income & Growth (CCJI ) was conceived in late 2015 to take advantage of the improving corporate governance outlook in Japan under Chikara Investments manager Richard Aston.

A corporate client of Peel Hunt, the trust targets companies with strong balance sheets, stable cashflows, attractive growth profiles, high-quality management and a focus on shareholder returns, with an overweight to small-caps driving outperformance of the sector and benchmark over five years.

Since inception, CCJI has delivered compound annual dividend growth of 8.5% and income distributions have made up around 30% of the total return, while the shareholder return story for corporate Japan has a lot of momentum and re-rating potential, Peel Hunt said.

Japanese equity markets are trading on a price-to-earnings discount to other developed markets and as of the end of June, 57% of companies in the Topix had net cash, more than double those on the FTSE All Share.

CCJI trades on a 7% discount and has a fully covered dividend yielding 2.8% – while the Topix offers a 12-month trailing yield of 1.76% – with an unbroken track record of consecutive annual dividend increases.

BlackRock Frontiers

BlackRock Frontiers (BRFI ) offers a 3.9% yield, driven by cash generation across its underlying investments in frontier economies – such as Indonesia, the Middle East and Hungary – whose performance is based more on their domestic outlook rather than wider global markets.

The £274m trust managed by Sam Vecht and Emily Fletcher had a strong 2023, as interest rate increases across Central Europe boosted its financial holdings, which make up almost half the portfolio.  

The full-year dividend of 8 cents is fully covered by 8.38 cents of revenue per share. Since 2011, BRFI has registered dividend growth of 8.5% on an annualised basis, Peel Hunt said.

Given the significant discounts to developed markets, frontier markets offer diversifying sources of both capital growth and income, the analysts said, with BRFI itself trading at a discount to frontier markets, while the shares closed on Wednesday at a 9% deficit.

Infrastructure

BBGI Global Infrastructure (BBGI ) manages a global portfolio at the lower end of the risk spectrum, with a focus on public-private partnership assets that provide long-term contractual revenue backed by public sector counterparties.

Since inception in late 2021, the £1bn portfolio has delivered compound annual dividend growth of 3.4% under managers Duncan Ball and Frank Schramm, who is retiring at the end of the month. The targeted full-year dividend of 8.40p for 2023 is 1.68 times covered, with targets of 8.40p in 2024 and 8.57p in 2025.

The portfolio, which includes roads, bridges and hospitals, has high inflation linkage of 0.6% and isn’t demand-based or regulated. It has, however, been impacted by rising interest rates and the corresponding rise in UK government bond yields, although these headwinds are due to dissipate, Peel Hunt said.

It noted the 6.3%-yielder’s annual ongoing charges of 0.92% are the lowest in the sector, while it has the highest dividend growth among its peers. The shares are trading at an 11% discount.

Cordiant Digital Infrastructure

Cordiant Digital Infrastructure (CORD) offers a portfolio with a high level of contractual visibility and inflation linkage, as well as double-digit revenue growth, from its four assets.

The funds raised at IPO in 2021 have been deployed at an average enterprise value to pre-tax profit multiple of 10.2 times, supporting the £1.2bn fund’s accelerated dividend growth profile, with a full-year payout of 4p targeted for 2023 or 5.4% yield.

This has been supported by robust underlying earnings and cashflows, with earnings covering the 2p per share first-half dividend 3.6 times. The balance sheet isn’t stretched, Peel Hunt added, with net gearing, or borrowing, of 38% of gross asset value.

The shares have reflected volatility over the last 18 months, while the severe derating of peer Digital 9 Infrastructure (DGI9), which was included in Peel Hunt’s growth playbook last week, is also having an impact.

The board initiated a share buyback programme for up to £20m last February to combat the discount, which sits at 34%, with £4.6m spent so far.

Infrastructure/renewables

Greencoat UK Wind (UKW ) returns to the income playbook after delivering the highest dividend growth rate of 2023, with full-year guidance upgraded 30% from 8.76p to 10p in late October, a 6.8% yield, which it aims to maintain this year.

The solely wind-focused £3.9bn portfolio has delivered a compound annual dividend growth rate of 4.8% since launch in 2013, including the expected payout for 2024, and the board has explicitly stated its commitment to grow it in line with inflation.

UKW’s published dividend cover figures benefit from its focus on non-amortising term debt. With the 10p dividend covered 2.1 times, Peel Hunt said this appears robust versus renewable generation peers’ figures, which exclude the amortisation of debt payments.

The fund was also impacted by the high rate environment but the board took advantage of excess cashflow to reinvest back into the portfolio and buy back shares, with a £100m programme announced at the end of the year. The shares closed at trading 12% below NAV.

Debt

Sequoia Economic Infrastructure (SEQI ) offers a £1.6bn portfolio of infrastructure project debt through private debt and bond investments in data centres, telecom towers, as well as power and transport-related sectors across North America, Europe and the UK.

The use of short-duration floating rate loans for almost half the portfolio means SEQI has been able to realise and reinvest proceeds to take advantage of further hikes.

In November 2022 the company increased its dividend target 10% to 6.875p, which represents a fully covered yield on share price of 7.8%.

While the fund focuses on senior-ranking debt, which makes up 56% of assets, there have been some high-profile defaults in recent years, including Bulb Energy. Peel Hunt took comfort in SEQI’s track record, with an annualised loss rate of 0.6%.

The fund marks the investments to market every month. The portfolio offers a yield to maturity of 10% thanks to the underlying income and the expected pull-to-par of marked-down fixed-rate loans, which is compelling, especially with the shares trading 12% below asset value, according to the analysts.

BioPharma Credit

BioPharma Credit (BPCR ) launched in March 2017 and primarily generates income from debt investments backed by life sciences products, such as drugs that have been approved, targeting an annual payout of 7 cents and a special dividend.

The £1.3bn fund had a portfolio of 12 investments at the end of November, with 98% in floating-rate loans and the remainder fixed.

BPCR had its first default last month, with point-of-care diagnostics business LumiraDx, which was sold to Roche at the end of December, defaulting on the loan. It is now due to delist, offering the prospect of a partial recovery.

While Peel Hunt was disappointed, it considers it an anomaly, especially as going forward, manager Pharmakon Advisors is setting a much higher bar for tools and diagnostics investments, given the heightened risk profile.

BPCR has maintained a fully covered annual dividend, which delivers a 7.4% yield on the shares that currently sit 6% below par. The board has recently resumed buybacks after a restriction was lifted following LumiraDx’s sale.

Shipping

Tufton Oceanic Assets (SHIP ) owns a portfolio of secondhand vessels, which it leases, or charters, to third-party operators such as oil majors, commodity traders and merchants.

SHIP’s portfolio comprises 22 vessels, including nine bulkers, 10 product tankers, two chemical tankers, and a liquefied petroleum gas (LPG) carrier, which is set to fall to 20 total vessels and eight product tankers following recently agreed sales. These are smaller ships that can visit harbours of varying size and carry a wider range of cargo, ensuring more stable employment.

The £408m fund focuses on long-term charters, with a weighted average of 1.7 years, meaning it can forecast dividend cover for the next 18 months of at least 1.8 times. SHIP significantly increased its dividend to 10 cents this week, representing a 9.4% yield.

The company believes the slow transition to zero-carbon fuels should ensure strong supply-side fundamentals will continue to support high yields in the medium term but has said it will start selling assets from 2028. It also committed to increasing the annual dividend target by 18%, in an announcement earlier in the week.

The 27% discount to NAV is unjustified, Peel Hunt said, given the robust valuation, with two recent divestments at a 3% premium, while the recent dividend changes should drive a rerating.

The recent conflict in the Red Sea also demonstrates shipping’s ability to act as a hedge against strained supply chains. As ships are re-routed away from the Suez Canal, they increase tonne-mile demand (cargo carried × distance travelled) and vessel owners can expect to benefit from higher charter rates, Peel Hunt said.

Property

Peel Hunt is constructive on the growth outlook for Empiric Student Property (ESP), with further benefits expected from its Hello Student operating platform, which supports tenant satisfaction and re-booking rates, alongside operational efficiencies and dynamic pricing capabilities.

This has contributed to the £927m portfolio seeing like-for-like growth in average weekly rents of 10.5% for the current academic year and 99% revenue occupancy, driving a prospective dividend yield of 4.5%.

The fund, a corporate client, has been trading at a 22% discount to Peel Hunt’s expected net tangible assets, a measure equivalent to net asset value in non-property funds, for 2023, which is wider than comparable peer Unite (UTG).

Primary Health Property

Peel Hunt also picked another corporate client Primary Health Properties (PHP), which has a £2bn portfolio of healthcare facilities in the UK and Ireland.

The 6.9%-yielder has delivered 27 years of consecutive dividend increases and a 10-year compound annual earnings growth rate of 10%, while also benefiting from estimated like-for-like 3% income growth for 2023.

About 90% of the portfolio’s rent is backed by the government, the weighted average unexpired lease term of 11 years provides long-term cashflow visibility and rents benefit from either direct indexation or open-market term that tend to follow inflation.

The shares closed on Wednesday 8% below asset value, but have traded at an average 20% premium over the last five years.