Boris Johnson is a fan of cake and eating it, but every investor would doubtless like to have jam today and jam tomorrow. At this time of soaring inflation, obtaining any jam at all has become harder.
Those who would like a decent income on their investments now, and in years to come, have a tough task on their hands.
Rising interest rates are unlikely to make it easier as they won’t boost bank deposit rates by much: 0.01 per cent is the typical return you will receive on your ‘liquidity buffer’, or rainy day savings.
Fortunately, some equity income investment trusts and funds are more generous. A few have yields of 4 per cent or more. These may not match inflation, but are still a boon for those squeezed by the pandemic dividend drought.
Yet some analysts argue that these payouts can be too dependent on ‘old economy’ businesses such as oil and tobacco which risk becoming ‘stranded assets’, with negligible growth and a diminishing capacity to reward investors.
Others contend that these concerns are overdone, since the energy crisis sparked by war in Ukraine has shifted the perception of prospects for oil firms.
This dissent suggests it’s worthwhile finding out which shares supply the bulk of the payout from an equity income trust or fund. You may discover a fund or trust’s stock-selection jars with your ethical or environmental principles.
Tobacco firms often form a big chunk of a portfolio. City of London Trust’s largest holding is British American Tobacco, an obvious choice as its estimated dividend yield for 2022 is 8.5 per cent.
Yet there is doubt about Big Tobacco’s ability to diversify, leading Scottish Widows to sell £1billion-worth of shares, its pension investments head Maria Nazarova- Doyle, saying: ‘Industries such as tobacco are at severe risk of becoming stranded assets, as they face intense pressure from investors, regulators and consumers.’
Before the war in Ukraine, oil shares also seemed destined for stranded asset status, but dependence on fossil fuels could last longer than earlier supposed.
City of London Trust’s largest holding is British American Tobacco, an obvious choice as its estimated dividend yield for 2022 is 8.5%, but is tobacco at risk of becoming a stranded asset?
Several major equity income trusts, including Aberdeen Standard Equity Income, Edinburgh, Law Debenture, Merchants and Temple Bar, rely on dividends from BP and Shell. They will distribute £3.6billion and £5.4billion respectively this year.
Eco-conscious investors may wish that their income was coming from another source, although bumper oil revenues should allow BP and Shell to spend more on renewable energy development.
If you think you should be trying to secure an income from a wider range of sectors, the Brunner trust owns such varied businesses as Adidas, Microsoft and Visa.
Matthew Tillett, the manager, says: ‘We’re looking for high quality companies, positioned to benefit from longer-term changes in the economy and society – like the expansion of the digital economy and the ageing of the population.
‘We’re confident we can continue to generate a reliable rising income stream… for years.’
This trust is at a 14 per cent discount to the net value of its assets, which represents an opportunity.
Analysts Stifel says the Murray International and Murray lncome trusts are also at a discount. These endeavour to provide exposure to a broad swathe of businesses with potential to evolve.
Taiwan Semiconductor Manufacturing Company, maker of chips for phones and electric vehicles, is Murray International’s biggest stake. Murray Income’s is Diageo, the drinks firm which is moving into non-alcoholic spirits like Seedlip. Tequila seemed set to supplant vodka in the US, even before the war.
Some funds aim for a mix of assets, balancing the requirement for current and future yield. The constituents of all fund and trust portfolios are in their monthly factsheets, available online.
A thorough check should ensure whether you should be able to enjoy treats now and for the next decade. I spend a lot of time going through this information.
Dull, I know, but crucial if you like your jam.
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