Investment trusts can be an ideal way to bring a reliable, diversified income into your portfolio. One reason for this is that they give you access to a wider range of asset classes than usual.
Today I’m going to look at two investment trusts which I think could provide a profitable way to invest in the UK and Europe, with an eye on future growth.
High yield and capital returns
Shareholders in Hansteen Holdings (LSE: HSTN) will know that this real estate investment trust (REIT) recently completed the €1.28bn disposal of its German and Dutch property assets.
Management believes that the deal “realises the value in the German and Dutch portfolio when occupancy and rent were at a high point for Hansteen ownership and also when [the] Euro/Sterling exchange rate was historically favourable”.
In other words, they reckon they’ve maximised the profit from these assets, and exited close to the top of the market.
Interestingly, Hansteen doesn’t have the same view of the UK market. In its recent interim results, joint chief executives Ian Watson and Morgan Jones commented that “for the first time in many years, strong occupier demand has resulted in increasing rents”. This has pushed up property values, a process that Watson and Jones believe may continue.
Hansteen should certainly have a good view of the UK market, as it has 3,231 tenants across a broad range of commercial sectors.
The cash remaining from the German/Dutch sales after debt repayment — about £580m — will be returned to shareholders by the end of 2017. This is equivalent to 70p per share, or around half the current share price.
However, what’s more interesting is that the group expects to be able to be able to pay a higher ordinary dividend on its reduced capital base. In last month’s interim results, the company’s guidance was that investors should expect an increase on the 2016 dividend of 5.9p per share.
Looking ahead, consensus forecasts suggest a payout of 6.2p per share for 2018. That’s equivalent to a yield of 4.6%. In my view, Hansteen stock remains attractive at current levels and could be a sound long-term income buy.
Profit from internet retail
If you want to profit from the internet retail boom, you could invest in a retailer. But I’m more attracted to an investment trust that’s focused on providing the infrastructure needed to support this long-term shift.
Segro (LSE: SGRO) is a REIT specialising in logistics properties — warehouses and distribution centres. Its portfolio includes properties in the UK, France, Germany, Italy and Poland and management recently raised £557m through a rights issue to fund further growth.
By focusing on major cities and other areas where huge volumes of goods are funnelled through major transport routes each year, Segro has built a valuable portfolio.
At the end of June, this portfolio was 94% occupied and had a net yield of 5.7%. The average lease length to first break clause was seven years, while the loan-to-value ratio of the portfolio was just 29%.
My view is that this profile should provide stable and predictable earnings. And although the stock does trade at a slight premium to book value, I think the 3.1% dividend yield remains attractive as a long-term income.