A central bank interest rate cutting cycle is well underway, the Federal Reserve having slashed US rates by 50 basis points and further cuts expected from the Bank of England following August’s 25 basis point reduction. Falling rates mean lower rates on cash and bonds, so this seems like a sensible time for investors searching for long-term income and capital growth to review their portfolios.

Helpfully, The Association of Investment Companies (AIC) recently published (2 October) a comprehensive list of the 26 investment trusts that invest in equities and offer a yield of at least 4.5%. Nearly all of these trusts, 23 out of 26 to be precise, currently trade at a discount to NAV (net asset value), while over half (15) sell on a double-digit discount to their underlying assets.

HIGH INCOME FROM HFEL

A total of 18 trusts yield 5% or more, while a further eight offer yields of between 4.5% and 5%. Of the aforementioned 26 trusts, the highest yielding is Henderson Far East Income (HFEL), whose bumper 10.3% yield is clearly welcomed by investors given that the shares trade at a 2.4% NAV premium. Managed by Janus Henderson Investors’ Sat Duhra, the fund aims to provide a growing annual dividend and capital appreciation from a diversified book of high quality, Asia-Pacific-based firms, with top 10 holdings including from world’s biggest memory chips and smartphone maker Samsung Electronics (005930:KS) and the globe’s largest contract chip manufacturer TSMC (TSM:NYSE).

Henderson Far East Income is one of the AIC’s ‘next generation’ dividend heroes - trusts that have increased the dividend for 10 or more years in a row but fewer than the 20 required for ‘dividend hero’ status - having hiked the shareholder reward for 16 consecutive years, and the board has an increased willingness to dip into the trust’s revenue reserves to support future payments. Duhra has reduced the trust’s exposure to China, which drove underperformance in full year 2023, and increased positions in well-priced value names in populous India and Indonesia.

Also trading at a premium, and offering a plump 7.4% yield, is Chelverton UK Dividend Trust (SDV), which has outperformed Henderson Far East Income on a 10-year share price total return basis, having generated 85.4% versus the latter’s 50.5% haul. Steered by David Horner and Oliver Knott, Chelverton UK Dividend aims to deliver a high and growing income by investing in mid and small caps outside the FTSE 100 and returned to a position where the dividend is being paid entirely from the current year revenue surplus after costs. In the future, the board plans to increase dividends by a level in excess of prevailing inflation and use any surplus to replenish the trust’s revenue reserves.

HELP FROM THE HEROES

Almost a quarter (six) of the highest yielding investment trusts are fully fledged AIC dividend heroes with at least 20 years of unbroken dividend growth under their belts. They include the popular City of London (CTY), the UK Equity Income sector stalwart offering a gateway to large international companies with a strong long-run performance record. City of London has achieved 58 years of consecutive dividend hikes, the longest streak amongst the dividend heroes, and upped its year-to-June 2024 payout by 2.5% to 20.6p, ahead of UK CPI (consumer price index) inflation, while revenue reserves increased by 5.8% to 9.4p, leaving City of London well-placed to extend its formidable dividend growth record.

Also with more than half a century of dividend increases to its name is JPMorgan Claverhouse (JCH), on 51 years of undisturbed payout growth, while the Simon Gergel-managed Merchants (MRCH) has notched up over four decades of unbroken dividend growth. Sue Noffke-steered Schroder Income Growth Fund (SCF) and the Manny Pohl-managed Athelney Trust (ATY) sit on 29 years and 21 years respectively.

But the highest yielding dividend hero is abrdn Equity Income Trust (AEI), which offers an attractive 7.2% yield and a dividend which it has upped for 23 years on the spin. While manager Thomas Moore has been finding a number of attractive opportunities across the undervalued UK stock market of late, NAV performance has lagged the FTSE All-Share index over the past five years, with factors such as a greater allocation to mid-caps than peers at play.

GOING GLOBAL FOR INCOME

While 11 of the 26 trusts yielding at least 4.5% emanate from the AIC’s UK Equity Income sector, there are two trusts from each of the following sectors - UK Smaller Companies (Marwyn Value Investors (MVI), Athelney), Flexible Investment (UIL (UTL) and CT Global Managed Portfolio Income (CMPI), and Asia Pacific Equity Income (Henderson Far East Income and abrdn Asian Income Fund (AAIF)).

Income seekers can also gain exposure to high-yielding trusts targeting other key regions of the globe. BlackRock Latin American (BRLA) offers an optically attractive 7.1% yield, but this reflects a poor 10-year share price total return of 16.3% delivered in what remains a volatile region, while European Assets (EAT) offers a play on the earnings and dividend growth potential of continental small caps.

Trading on a 5.3% yield is abrdn Asian Income Fund, which offers a diversified entrée into the compelling dividend story emerging in Asia. Also meriting mention is Middlefield Canadian Income (MCT), an AIC North America sector constituent trading on a double-digit NAV discount with an attractive 4.5% yield. Focused on generating high income from great Canadian businesses, rate cuts by the US Fed and the Bank of Canada should create a tailwind for the Canadian dividend-paying companies targeted by managers Dean Orrico and Rob Lauzon.