Better still, investment trusts also have some structural advantages that can enable medium to long-term investors to ride out stock market storms, such as those caused by the coronavirus crisis.
While Bank of England base rate languishes at an all-time low of 0.1%, enhanced dividends are increasingly important for rising numbers of people, including those who aim to fund retirement with income from their investments.
Dividends are the income shares can pay to investors and yield is the income paid by an asset, expressed as a percentage of its purchase price. It is important for investors to remember that share prices can fall without warning, as most have done recently because of the coronavirus crisis. Similarly, dividends can be cut or cancelled and are not guaranteed.
It may be dangerous for stock market investors to ‘chase yield’ – or buy shares offering high dividends. A high yield can be a sign that the market expects dividends to be cut or cancelled or some other form of trouble to come.
Investment trusts enjoy an advantage over other forms of pooled funds – which aim to diminish the risk of stock markets by diversification – because some of these trusts can enhance dividend payments to their shareholders. Investment trusts can do this by supplementing income from their underlying portfolios of assets with capital gains realised by selling any of those assets that might have appreciated on the stock markets. This facility is variously known as enhanced dividends, enhanced income or enhanced yield.
Growth or income or a mixture of both
Investment returns come in two forms; capital gains or growth, generated by increases in the price of an asset, and income payments – such as dividends. This fact is reflected by HM Revenue & Customs (HMRC) imposing two different levies – primarily income tax and capital gains tax. There are also two different sets of annual allowances, or amounts of income and capital gains that can be received each year before tax must be paid.
Similarly, many different types of investment trust seek different forms of return – as often indicated by the word ‘growth’ or ‘income’ in their title. Some, such as JPMorgan Asia Growth & Income (stock market ticker: JAGI), JPMorgan China Growth & Income (ticker: JCGI) and JPMorgan Global Growth & Income (JPGI) aim for a mixture of both. Investment trusts make it cost-effective and easy to gain exposure to growth and income opportunities overseas, including stock markets not previously associated with dividends.
The top performing trust in Asia Pacific income
JPMorgan Asia Growth & Income (JAGI) is the top performing investment trust in the Association of Investment Companies (AIC) Asia Pacific Income sector over the last one, five and 10 years. This trust aims to get a growth total return, primarily from investing in shares listed on the stock markets of Asia, excluding Japan. The main countries in which it invests are China, Korea, Taiwan and India. Its shares are priced 2.3% lower than its net asset value (NAV) and an enhanced dividend policy has enabled it to offer a dividend yield of 4.7%.1
The top performing country specialist: Asia ex-Japan
JPMorgan China Growth & Income (JCGI) is the top performing investment trust in the AIC Country Specialist: Asia ex-Japan sector over the last year and five-year periods. This trust aims to provide long term capital growth by investment in companies listed in Greater China - that is, China, Hong Kong and Taiwan. It aims to outperform the MSCI China Index total return, with net dividends reinvested, in sterling terms. The shares are currently priced 6.9% lower than their NAV to give a double-digit discount. An enhanced dividend policy enables this trust to yield 4.1%.2
Growth & income wherever it can be found
JPMorgan Global Growth & Income (JGGI) aims to achieve income and capital growth from world stock markets by holding a diversified portfolio of investments in which the portfolio manager has a high degree of conviction. Top holdings currently include the technology companies Microsoft, Alphabet (the owner of Google) and Amazon, as well as the iconic soft-drinks maker, Coca-Cola.
At the time of writing, this trust’s shares are priced 5.1% higher than their NAV and an enhanced dividend policy delivers a yield of 4.7%.3
Income from the next generation of Japanese ideas
JPMorgan Japan Smaller Companies (JPS) is the top performing investment trust in the AIC Japanese Smaller Companies sector over the last year. This trust aims to achieve long-term capital growth through investment in small and medium sized Japanese companies, excluding the largest 200 measured by market capitalisation. The shares are priced 7.6% lower than its NAV and an enhanced dividend policy enables this trust to yield 5.1%.4
Income today, growth tomorrow
Enhanced dividend policies can potentially enable investment trusts to meet many investors’ need for income today while balancing this with other shareholders’ requirement for growth tomorrow. However, it is important to understand that enhanced dividends are not a panacea. There is a risk that the price of higher income today might be lower total returns tomorrow. This is why investment trusts’ independent boards of directors regularly review whether enhanced dividend policies remain in the best interests of all shareholders.
Past performance is not a reliable indicator of current and future results.
Source: All share prices and performance figures sourced from Morningstar via the Association of Investment Companies on April 2, 2020.