18 investment trusts yielding 4.5% or more: key things to consider

For the first time in more than a decade, income seekers are spoilt for choice, as equities are no longer the only game in town to procure high yields.

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Cash-like investments, such as money market funds are one option. Yields on money market funds are closely linked to the Bank of England interest rate, so shot up when interest rates began to rise towards the end of 2021. UK interest rates are currently 4.5%, compared with a recent peak of 5.25%. Annualised yields on money market funds are generally just above the base rate, so investors continue to pocket a safe return well ahead of the UK inflation rate of 3%.

Other lower-risk options include UK government bonds or gilts, which are offering a lot more income than they have for a long time in response to interest rate rises. Yields are a little over 4%, depending on when the bond matures, but by buying a gilt and holding it to maturity you are effectively locking in a return, whereas savings rates can be cut by your bank. Gilts can be traded on the ii platform, similar to equities.

Delving into the corporate bond market, which are those bonds issued by companies, investors would be looking at a yields of around 5.5% for bond funds that mainly stick to high-quality issuers. Among the options in interactive investor’s Super 60 list of investment ideas are Jupiter Strategic Bond and Invesco Sterling Bond.

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However, while cash and bonds form an important part of a balanced portfolio by acting as “defenders”, and meeting any short-term income needs, equities are the key piece of the jigsaw to grow wealth in real terms over the long term.

Equity income funds, through targeting companies that pay dependable dividends, tend to provide a smoother ride than growth funds.

Investment trusts offer investors the prospect of more consistent income than funds, due to their ability to retain up to 15% of income generated each year in reserve. Those reverses can be drawn on during lean periods.

Research by Stifel, the analyst, found that there are currently 18 investment trusts, predominantly investing in equities, that are yielding 4.5% or higher.

Most of those offering high income are trading on a discount and, in some cases, a double-digit discount.

Among the 4.5%-plus yielders are long-established UK equity income portfolios Merchants Trust  (LSE:MRCH), JPMorgan Claverhouse (LSE:JCH), City of London (LSE:CTY), Murray Income Trust (LSE:MUT), and Schroder Income Growth (LSE:SCF).   

These are “dividend heroes”, having consistently raised payouts for decades.

However, the highest-yielding dividend hero, with 24 consecutive years of income increases, is abrdn Equity Income Trust (LSE:AEI), yielding 7.1%.

Most of the highest yielders invest in UK dividend-paying companies. The other UK trusts (those not mentioned above) that feature in the table are Montanaro UK Smaller Companies (LSE:MTU), Lowland (LSE:LWI), Dunedin Income Growth (LSE:DIG), Diverse Income Trust (LSE:DIVI) and Invesco Perpetual UK Smaller Companies (LSE:IPU).

However, topping the table with a sky-high dividend yield of 11% is Henderson Far East Income (LSE:HFEL). While offering high income, its overall total returns over three and five years are pedestrian, up 3.3% and 6.6%. However, its one-year return is more favourable, up 12.9%. Also investing in Asia equities is abrdn Asian Income Fund (LSE:AAIF), yielding 6.6%.

With yields for funds and investment trusts, it’s important to bear in mind that they are not guaranteed or fixed. Stifel has flagged that BlackRock World Mining Trust (LSE:BRWM), which specialises in commodities, is expected to cut its dividend. Stifel expects the dividend yield to fall from 7% to 5%.

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Source: Stifel. Data to 28 February 2025. 

The key things to size up with these high yields 

There are a few things to bear in mind when considering these high-yielding options. First, investment trusts tend to be more volatile than funds over shorter periods due to discounts potentially widening and the ability to gear (borrow to invest), so make sure you are comfortable with that.

Second, consider the strength of the dividend reserves, which enables investment trusts to bolster dividend payouts in leaner years. The revenue reserve figure, expressed in years, is published on the Association of Investment Companies (AIC) website.

A third consideration is that some trusts pay dividends as a fixed percentage of the net asset value (NAV). Typically, these pay out 4% of NAV per annum as a dividend, often calculated using the NAV at the trust’s year-end. Therefore, investors need to be aware that in years when the NAV on these trusts falls, the total dividend paid and the prospective yield in the following year are also likely to decline. 

How income is generated from the underlying investments is also important. Some investment trusts finance their dividends from capital as well as income. This approach is all well and good when capital returns are being delivered, but it tends to be more erratic when stock markets are more volatile. 

Another thing to remember is that high yields do not mean market-beating returns from a total return perspective, when both capital and income are combined.

In addition, dividend growth may be higher for trusts with lower yields today. 

Finally, while there are no excessive premiums in the above table, this is something to keep an eye on. When buying on a premium, investors buying today are paying more than the underlying assets are worth. In general, investors should be cautious when a premium is 5% or higher, since premiums do not tend to be sustainable over time.