The big-yielding FTSE dividend shares and trusts with a track record

SIMON LAMBERT: Dividends deliver long-term returns but should you pick big name FTSE shares on bumper yields or an investment trust that spreads risk

We struggle to resist shouting about company share prices in headlines, but if you look at the stock market as whole it’s dividends that are a powerful driver of long-term overall returns.

A wealth of respected studies highlight this, such as the Barclays Equity Gilt Survey and Credit Suisse yearbook, but there is also some compelling evidence close to home.

Over the past decade the share price return on the FTSE All Share has been 39 per cent, but the total return on the cheap tracker HSBC FTSE All Share index fund has been 100 per cent – meaning investors doubled their money.

The former is a somewhat underwhelming figure for a decade’s worth of investing, even in a stock market as lacklustre as the UK’s, the latter is a decent average annual return of 7.1 per cent.

Dividends are a powerful source of long-term investment returns but chasing individual big yielding stocks is a risky move

Income investing – as backing stocks for their dividends is known – remains highly popular, despite the stock market story of recent years being all about disruptive growth companies and their stratospheric gains.

Some very high-profile members of that club have come crashing down to earth this year, as high inflation and rapidly rising interest rates unnerve investors, who have been valuing shares based on central banks never shifting from their cheap money-forever policies.

The dramatic turnaround at the Federal Reserve, Bank of England, and the ECB’s half-hearted attempt at one, has well and truly upset the apple cart. It’s become clear that rather than making protecting investors and homeowners paramount, central bankers now prize fighting inflation above all else.

The post financial crisis thinking has been turned upside down and investors can’t quite work out what a Netflix share is worth in the brave new world – but they do know it’s a lot less than they were willing to pay for it before: 64 per cent less this year at the time of writing.

You’d think in this scenario that there would have been a dramatic switch back to dividend-payers – and sentiment has turned back towards them but perhaps not as much as one would expect.

There are still lots of stocks in the Footsie on hefty yields, for example. So, why aren’t investors beating down the doors for yields like Abrdn’s 9.5 per cent, Aviva’s 7.4 per cent, Barratt’s 6.7 per cent, Sainsbury’s 6.1 per cent, or Lloyds’ 4.6 per cent?

Part of the answer lies in them just being deeply unfashionable and seen as offering little future growth, and part in that many expect a recession is going to drag those company’s share prices down from where they are now – and may lead to dividends being cut.

That’s one of the chief problems with investing in big dividend yield individual company shares: it’s very easy to get caught out and find you’ve backed a dividend trap rather than an underappreciated reliable income-payer.

This means it is important to look at things such as dividend cover to see how well those payouts are protected – you can find dividend cover figures in our share data pages – and not to put all your eggs in one basket. 

One method is to pick a portfolio of big dividend shares – although this comes with more potential volatility than a broader portfolio, as many big yielders will be exposed to the same issues – and our Midas Share Tips column does this with the Dogs of the Footsie share picks.

Another is to take the easy diversification route of a fund or investment trust.

You could take the aforementioned cheap tracker option – the FTSE All Share currently yields 3.9 per cent and is one of the world’s cheaper stock markets.

Or you could opt for an active fund or investment trust. The latter is a good option for income investing, as they can hold over some dividends in the good years to help maintain payouts in the bad.

This week, the Association of Investment Companies released a list of 42 investment trusts with a yield above 3 per cent and a five-year track record of increasing dividends.

It’s a diverse bunch and you wouldn’t want to sink all your money into any of them – in particular the more esoteric ones – but they are worth a look to harness the long-term power of dividends.

Here is the list below, as ever, do your own research before investing. 

CompanyAIC sectorYield5-year dividend growth p.a. (%)Consecutive years of dividend increases over more than a decade**
CQS New City High YieldDebt  Loans & Bonds8.680.4114
Henderson Far East IncomeAsia Pacific Equity Income8.483.1915
Apax Global Alpha*Private Equity7.248.82
GCP Asset Backed IncomeDebt  Direct Lending7.111.6
abrdn Equity IncomeUK Equity Income6.946.621
CT UK High IncomeUK Equity Income6.862.92
NextEnergy SolarRenewable Energy Infrastructure6.852.56
Henderson High IncomeUK Equity & Bond Income6.071.69
Target Healthcare REITProperty  UK Healthcare6.021.69
Montanaro UK Smaller Companies*UK Smaller Companies5.9125.12
JLEN Environmental Assets GroupRenewable Energy Infrastructure5.92.06
CT Private Equity*Private Equity5.819.7210
CT Global Managed Portfolio IncomeFlexible Investment5.264.0611
LowlandUK Equity Income5.196.0112
Greencoat UK WindRenewable Energy Infrastructure5.022.52
Value and Indexed Property IncomeUK Equity Income52.7535
MerchantsUK Equity Income4.932.4440
JPMorgan Elect Managed IncomeUK Equity Income4.884.0211
Lindsell TrainGlobal4.8442.1810
City of LondonUK Equity Income4.813.2556
JPMorgan ClaverhouseUK Equity Income4.85.8149
International Public PartnershipsInfrastructure4.722.5713
Dunedin Income GrowthUK Equity Income4.591.9711
abrdn Asian IncomeAsia Pacific Equity Income4.531.6613
AthelneyUK Smaller Companies4.522.0119
Schroder Income GrowthUK Equity Income4.483.8426
Invesco Asia*Asia Pacific Equity Income4.4228.9
Murray InternationalGlobal Equity Income4.412.9816
BBGI Global InfrastructureInfrastructure4.413.24
Henderson International IncomeGlobal Equity Income4.246.26
Murray IncomeUK Equity Income4.131.3648
Schroder Oriental IncomeAsia Pacific Equity Income4.064.3215
Diverse Income TrustUK Equity Income3.946.02
Utilico Emerging MarketsGlobal Emerging Markets3.923.77
JPMorgan Global Growth & Income*Global Equity Income3.920.77
CT UK Capital & IncomeUK Equity Income3.872.4128
Law Debenture CorporationUK Equity Income3.7811.6712
TR PropertyProperty Securities3.6811.212
North American IncomeNorth America3.577.4211
MercantileUK All Companies3.558.45
CC Japan Income & GrowthJapan3.515.7
Invesco Select Trust Global Equity Income shares*Global Equity Income3.212.2411
Source: AIC/Morningstar, as at 22 July 2022. Includes investment companies that meet both of these criteria: (a) a yield of at least 3% based on dividends from the last complete financial year divided by the current share price; and (b) a record of increasing their annual dividends for at least five years in a row. Special dividends are excluded. Investment companies that are winding up are excluded. * These companies have paid dividends out of capital profits over the past five years, or have a target dividend set at a fixed percentage of the investment company’s NAV which may include distributions from capital profits. ** The number of consecutive years over which an investment company has increased its annual dividends is given only for investment companies that have a record of at least ten years of dividend increases