Top ‘ultimate income’ investment trust named

Dividend heroes are investment trusts whose dividend increased every year for 20 consecutive years or more, according to the AIC.

According to AJ Bell, Witan comes top of the pack for its current yield, at 17.9 per cent, which equates to almost £1,800 for every £10,000 invested a decade ago.

The trust has one of the longest track records of raising its dividend at 44 years.

AJ Bell's analysis compared the current yield to the share price of each trust when purchased by an investor 10 years ago, on the basis that investors could be getting far higher yields on their money than the headline figure now.

Over the past decade, investors in Witan who had automatically reinvested their dividends would have seen a total return of 237.7 per cent, the research showed.

AJ Bell also looked at the 'next generation dividend heroes' - those that have increased their dividends every year for 10 years or more.

It found a total of 20 trusts were yielding 7 per cent or more, based on today’s income and buying the trust 10 years ago, while four trusts were yielding 10 per cent or more.

Laura Suter, personal finance analyst at AJ Bell, said: “The reality is that most investors buy and hold over a long period, and these figures will be a welcome boost to those who bought 10 years ago and are sitting on a hefty yield today.”

The Henderson Smaller Companies trust is one of the four investment trusts yielding 10 per cent or more, while the others are BlackRock Smaller Companies and British & American.

But the research showed while the British & American trust made the top income trusts, yielding 10.1 per cent, it was one of the few to have seen its share price fall during the 10 years, which served to boost the 10-year yield figure.

The value of the yield of an investment trust rises as the share price falls because it is measured as a fraction of the price, meaning if the share price goes down the fraction is bigger.

Ms Suter said: “Four trusts have managed to deliver the holy trinity of a sizeable yield and a top total return.

“Henderson Smaller Companies, BlackRock Smaller Companies, Schroder Oriental Income and BlackRock Throgmorton all come top for the current yield on buying a decade ago and total return.”

Martin Bamford, chartered financial planner and managing director at Informed Choice, called the methodology “an innovative way to calculate an investment yield”.

He said: “It makes for an enticing headline, and represents the experience of long-term investors when they relate current dividends back to the original purchase price, but we must be careful not to suggest investments bought today are capable of yielding such fantastic sums.

“Investment trusts have a great role to play within investment portfolios, especially for long-term income-seeking investors.

"It’s essential that investors are aware of the way in which discount/premium pricing works, as well as the impact of gearing within the portfolios.”

If a trust's share price moves below its NAV, it is said to be trading at a discount, if it rises above, it is trading at a premium.

Trust managers also use gearing, which is a way to multiply returns by taking on debt. Though that can backfire when the invested assets lose money and losses deepen faster.

Scott Gallacher, chartered financial planner at Rowley Turton, added: “I would probably say one of the reasons [our] clients tend to avoid investment trusts and we’re cautious on recommending them is that additional risk factor.

“With investment trusts, because you have the extra risk of discount and premium and extra movement in the value of the investment in that sense, I don’t think they suit most investors that well.”

According to AJ Bell, a portfolio evenly split between the top 10 investment trusts by total return over the past 10 years would have grown £100,000 into more than £475,000 and would be generating almost £7,000 income currently, while a portfolio evenly split between the top 10 trusts based on current yield would have turned £100,000 into just over £365,000 but would be paying out current income of almost £10,000.

Top 10 trusts by total return

Top 10 trusts by current income