Finding sources of high dividends is becoming increasingly challenging. With inflation edging higher, demand for companies that offer real income returns is increasing. This could push their share prices higher, while at the same time make it even more difficult to beat inflation.
While an interest rate rise may be on the cards in the near term, it may be insufficient to significantly reduce the rate of inflation over the medium term. With that in mind, these two investment trusts could be worth buying right now.
Reporting on Monday was real estate investment trust (REIT), Real Estate Investors(LSE: RLE). The company is focused on commercial property in Birmingham, and it has enjoyed strong performance in the first half of its financial year. For example, its net asset value (NAV) per share increased by 2.1% and its revenue increased by 19.9%. This was despite continued market and political uncertainty, with the company's robust strategy and resilient investment market helping it to perform relatively well.
Real Estate Investors was able to increase dividends per share by 20% in the first half of the year. This puts it on a dividend yield of 5.1%, which is 2.2% higher than the current rate of inflation. The prospects for dividend growth appear to be encouraging. A rising dividend remains a central part of the company's strategy following five years of year-on-year growth. And with the West Midlands economy remaining vibrant and benefitting from weaker sterling, the performance of the business could remain strong.
Certainly, there are clear risks to the wider UK economy from Brexit. Uncertainty could cause reduced spending by businesses and consumers alike. However, with a price-to-book (P/B) ratio of just 0.9, the company appears to offer a wide margin of safety for the long term.
Also offering strong income prospects is The City of London Investment Trust(LSE: CTY). It has a dividend yield of 4.1% at the present time and a number of its major holdings have significant dividend growth potential over the medium term. For example, Lloyds is due to increase its payout ratio in the next couple of years, while Shell's free cash flow is expected to increase due in part to its acquisition of BG.
As well as dividend growth potential, the company has a diverse range of holdings which should minimise risk. For example, over 11% of its holdings are in non-UK equities. This could provide some geographical diversification, while an overall focus on the UK may allow it to continue to benefit from weaker sterling to at least some extent in future.
While it trades at a premium of 1% to its NAV, The City of London Investment Trust has a strong track record of growth. It has recorded a return of 24.6% over the last three years, which is almost 2% higher than its UK Equity Income benchmark. As such, it appears to be a shrewd buy for the long run.
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Peter Stephens owns shares of Lloyds and Shell. The Motley Fool UK has recommended Lloyds Banking Group and Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.