Monday 11 July 2022 12:40 pm

Doceo Insight – The £81bn jackpot and the investment trusts with the biggest shares

By: Frank Buhagier

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The number 81 will have different meanings for different people.  It might be someone’s age or year of birth.  Perhaps the last two digits of a credit card pin. For bus goers in the London area, the number 81 will get you from Slough to Hounslow and back again or, if in Merseyside, from Bootle to Liverpool John Lennon Airport.  For World War II buffs, No.81 Squadron flew operations in many of the main theatres of war including North Africa, the Mediterranean and Asia.  And for UK income investors, £81 billion (£81.2 billion to be precise) is what AJ Bell’s Q1 Dividend Dashboard predicts will be the total amount of dividends paid by FTSE 100 companies this year which, if met, will make 2022 the second-best year for total FTSE 100 cash returns.

An apology…

… to WWII aficionados, this article will focus on the above last point and will attempt to identify which UK-centric trusts have their fair share of the biggest dividend-paying companies in terms of pay out size. For good measure the top payers in both the FTSE 100 and 250 will be covered.  First things first – which FTSE100 and 250 companies are the top yielders?

The top 10 FTSE 100 yielders as at 22 June 2022

The top 10 FTSE 250 yielders as at 22 June 2022

Wealth warning

Yields can be high for a reason.  Traders and investors, for example, may believe a dividend cut is on the cards due to deteriorating trading conditions. As markets are forward-looking, share prices are marked down, yields are pushed up to eye-catching levels and the names of the stocks appear on top yielder lists such as the above, unless of course management announce a cut to the pay out.   

Fortunately, the evaluation of the likelihood or not of companies keeping to their dividend promises falls under the remit of the fund managers of the investment trusts concerned, not this article.  What this piece will attempt to do is identify which UK-focused investment trusts have material weightings to the shares of the UK’s top yielders and, at the same time, those that don’t.

Yet another warning

Investment companies issue portfolio breakdowns according to their own specific financial calendars.  Moreover, when they do, they do so via a variety of channels – regulatory press releases, websites, annual or interim reports.  This makes a comparison of individual trusts’ holdings on a specific date a challenge, at least for this writer.  The below findings are therefore based on the latest available information for each trust, rather than a snapshot of every trust covered on a certain date.

Doceo’s top 10 holders of the top 10 UK yielders

Totting up a trust’s weightings in the UK’s highest yielders only goes so far.  What about the number of the top payers each trust holds?  Crucial for risk-averse investors to know how the exposure has been gained – is it via a spread of individual companies or are all eggs in one basket? Aurora’s (ARR)13.5% exposure for example is comprised of one stock only – housebuilder Barratt Developments.  Fine for investors comfortable with a concentrated portfolio such as Aurora’s.  Not so ideal for those who like to see risk spread.

Helpfully, there are typically two ends to a scale. In this instance, ARR’s polar opposite is City of London (CTY) with its chart-topping 21% which is comprised of seven individual holdings – Rio Tinto, Phoenix, M&G, Imperial Brands, Legal & General, Persimmon and IG Group.  Merchants’ (MRCH) exposure, meanwhile, comes from six names – Imperial Brands, Legal & General, IG Group, Rio Tinto, Ashmore and M&G.  So too does abrdn Equity Income’s (AEI)11.5% – Rio Tinto, Diversified Energy, Legal & General, Imperial Brands, Phoenix and Ashmore.

A tongue-twister: the non-top 10 holders of the top 10 payers

But what about those trusts not on the above list, specifically those in the UK equity income sector which have their own relatively high yields? Where do the likes of Diverse Income Trust (DIVI: 4% yield), Dunedin Income Growth (DIG: 4.7% yield), Edinburgh Investment Trust (EDIN: 4.1% yield), Law Debenture (LWDB: 3.8% yield), Murray Income (MUT: 5.3% yield), Shires Income (SHRS: 5.3%) and Henderson High Income (HHI: 6.1%) all get their income from?

Diverse Income (DIVI): the clue’s in the name. DIVI invests in a lot of holdings.  According to the latest Half-year Report issued in February 2022, 94.1% of the trust’s net assets were invested in equities.  Of this, the top 40 holdings accounted for 50.5% of net assets with the remaining 43.6% invested in a further 82 equity investments.  In all, at the half-year stage DIVI was invested in 122 individual companies.  

Dunedin Income & Growth (DIG): according to the trust’s latest Annual Report DIG’s strategy is to have a “concentrated portfolio and being willing to be different to both the benchmark and peers”.  The Investment Managers Report goes on to say: “The portfolio continued to focus on delivering growth of both capital and income in a differentiated fashion with active share standing at 81% and more than half the portfolio invested outside the FTSE 100 Index.”  The trust also invests in non-UK companies including French energy giant, Total Energies (top ten holding), Scandinavian bank, Nordea Bank (top ten holding) Dutch lithography machine manufacturer ASML (top 20 holding), Danish pharma giant Novo Nordisk (top 20 holding), German insurer Hannover Re (top 30 holding) and car manufacturer Volvo (1.5% of assets).

Edinburgh (EDIN): none of the top 10 yielders in either the FTSE 100 or 250 appear in EDIN’s own top 10 positions.  Instead, the trust’s number one holding is Shell (7.3% of assets) which yields 3.5% followed by Tesco (5.2%) which has a 4.4% yield and Anglo American (5%) with its 6.6% yield.  As with DIG, EDIN invests in overseas stocks and as reported in the trust’s latest Annual Report had positions in Total Energies, chip maker Intel, Swiss pharma giants Novartis and Roche and Dutch telco KPN.

Law Debenture (LWDB): as well as investing in a portfolio of UK equities, as at the end of last year 18% of LWDB’s net asset value was invested in IPS, an independent professional services company which has funded approximately one third of the trust’s income over the last 10 years. In addition, it also has a smattering of the top 10 yielders including Rio Tinto and Direct Line among its top 15 holdings.

Murray Income (MUT): French energy giant Total Energies, which has a 5.5% yield, also appears among MUT’s top 10 positions.  The trust also holds Nordea Bank (7.6% yield).  Furthermore, MUT supplements the income it earns via an option-writing strategy.  As explained in MUT’s latest Half-year Report: “We believe that the option-writing strategy, which we have now employed for over 10 years, is of benefit to the Company by diversifying and increasing the level of income generated, providing headroom to invest in companies with lower starting yields but better dividend and capital growth prospects.” 

Shires Income (SHRS): the trust invests in preference shares and other fixed income securities to boost its income profile.  As at 30 April 2022, five preference shares occupied SHRS’ top 10 holdings which, when combined, accounted for almost a quarter of the portfolio. The trust also enters into traded option contracts, which also enhances income generation.

Henderson High Income (HHI): approximately 10% of HHI’s portfolio was invested in fixed income securities as at 30 April 2022.  At the same time, the trust’s top five equity positions, which accounted for almost 20% of the portfolio, included high yielders such as British American Tobacco (6.2% yield), Anglo American (6.6% yield) and Unilever (4% yield).

So, while the above six trusts might not have the largest weightings to the expected top contributors to 2022’s £81 billion dividend bonanza, they do have their own ways and means of generating income and competitive yields. 

And it is a good thing too that UK equity income investors have multiple options to choose from.  After all, the expected £81 billion jackpot is just that ‘expected’. Like the number 81 is ‘expected’ to arrive at Hounslow Bus Station 64 minutes after leaving Slough, it is not guaranteed to do so.  It does sometimes pay to have a back-up plan…