Looking for yield

Might Brexit spell redemption for hard-pressed investors seeking income? Mark Carney, the Governor of the Bank of England, said this week that if the UK votes to leave the European Union in this month’s referendum, the Monetary Policy Committee could be forced to raise interest rates in order to counter the inflationary effect he expects to see from such an outcome.

For investors fed up with rates that have been stuck at rock-bottom levels for more than seven years, that might be one welcome result of Brexit – even for those who count themselves as firmly in the remain camp. Still, voting for the UK to leave the EU isn’t exactly a targeted strategy – nor is it the only source of promise for income-seeking investors determined to access better yields.

According to a report published in recent days by the investment trust team at Stifel, no fewer than 19 investment companies currently offer a dividend yield of 4 per cent or more. With closed-ended fund shares having risen higher in strong markets, that is down from 21 in February, when Stifel last published this research, but it still offers a range of possible options for income seekers prepared to take at least some risk with their capital.

Indeed, Stifel’s list of high yielders is an eclectic bunch. It includes several UK equity funds, including Merchants Trust (currently on a yield of 6.1 per cent), Dunedin Income Growth (5.2 per cent), Murray Income (5.0 per cent), Schroder Income Growth (4.3 per cent) and City of London Trust (4.2 per cent). Further afield, the options include international funds such as European Assets (6 per cent) and Murray International (4.9 per cent).

There are also more exotic funds to choose from. BlackRock World Mining, for example, trades on a historic dividend yield of 9.4 per cent, though Stifel warns this year’s dividend will be lower, while Henderson Far East Income offers 7.1 per cent. JPMorgan Global Emerging Markets Income yields 5.4 per cent.

There are good reasons why so many investment companies are able to offer attractive dividends even in a climate such as now when income of every type is under pressure (we have seen many of the companies in these funds’ portfolios cut their own pay-outs in recent times).

First, closed-ended funds have a unique ability to build up reserve funds. In good years for dividend pay-outs, investment companies can keep back some money to underpin income distributions when times are leaner. Also, subject to shareholder approval, investment companies have the power – again, uniquely – to fund dividends from capital profits. This is a policy currently being pursued by European Assets, for example.

For many investment companies, the ability to offer an attractive yield with a steady stream of dividend increases represents an important selling point, which is why boards are so keen to perform consistently. That provides important comfort for income-seeking investors who have had to become accustomed to dividend volatility on other assets.

This is not to suggest investment companies represent some form of free lunch – unlike in the bank or building society, investors’ capital is at risk. This is why Stifel’s research carries an important caveat: “For those prepared to take equity risk,” it cautions, “these [19 high-yielding funds] may be attractive in this low interest rate environment”.

Nevertheless, the closed-ended sector has become an increasingly impressive source of respite for income seekers – both for the absolute levels of yield on offer, but also for the consistency of income so many funds deliver. Mr Carney’s thoughts aside, that looks likely to continue following the referendum, whatever the outcome.