Investing for dividends? Consider these high-yielding equity income investment trusts
Building a diversified portfolio of dividend stocks on a limited budget isn't easy. Despite commission rates coming down, transaction costs can really rack up if you don't have a lot of money to invest.
Equity income funds
Fortunately, there may be a cheaper option. You can invest for dividend income not only by purchasing individual company stocks, but also through investment funds, such as unit trusts, Open-Ended Investment Companies (OEICs) and investment trusts.
These funds invest in dividend-paying companies, with the intent of delivering regular income for their investors, paid out of the dividend income which they receive from their underlying investments. When it comes to diversification, equity income funds have therefore become popular with dividend investors looking for a low cost method of spreading the risk.
That is the case with TheMerchants Trust(LSE: MRCH). With a low ongoing charge of just 0.59%, it seeks to provide investors an above average level of income, as well as income growth and long-term growth of capital via investments in domestically-listed dividend stocks.
Simon Gergel, who has been managing the trust since 2006, has a preference towards large, well-established and well-known UK companies. In terms of recent portfolio activity, he added two new holdings to the portfolio -- shopping centre real estate company Hammerson and wealth manager St James's Place.
Altogether, there were 49 stock positions in the portfolio at the end of March 2018, with the largest holdings beingRoyal Dutch Shell (7.0%), GlaxoSmithKline (6.5%), BP (4.8%), UBM (4.3%) and HSBC Holdings (4.2%). The financial sector is its largest sector exposure, with a 31% weighting, and this is followed by industrials (16%) and consumer services (15%).
The Merchants Trust has an impressive track record for growing shareholder payouts, after having increased its dividend payouts to shareholders over the past 36 consecutive years. It currently has a yield of 4.8% and trades on a small discount to net asset value (NAV) of 3.4%.
Shires Income(LSE: SHRS) is another equity income fund which offers an attractive yield. Shares in the investment trust currently offer a yield of 4.5% as they trade at a slight premium to its NAV of 1%.
But unlike the Merchants Trust, which invests primarily in equities, this fund seeks to provide shareholders with a high level of income by also investing in preference shares, convertibles and fixed income securities.
This multi-asset approach divides the money invested between the various asset classes, adding to its diversification, which can help to reduce risk. On the downside however, the fund is also more exposed to the risk of rising interest rates, which could be a concern for investors.
Also, unlike the Merchants Trust, Shires Income also gets exposure to smaller companies via an investment in its sister small-cap equity income fund Aberdeen Smaller Companies Income, which accounts for 8.9% of its assets. Sector-wise, financials (again) dominate the Shires Income portfolio, accounting for 52% of total assets, and this is followed by consumer goods (11%) and industrials (10.4%).
Fees for the fund are a bit higher than the Merchants Trust, with an ongoing charges figure of 1.04% for the past year.
Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended HSBC Holdings and UBM. 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.