Recent swings in the value of sterling and market volatility have pushed down the price of some investment trusts that have a lot of overseas exposure. One such investment trust has seen its share price fall by 39% over the past year. The falling share price means the trust now has a dividend yield north of 10%. But will it last?
Double-digit yield
The share in question is the European Assets Trust (LSE: EAT).
At the current share price, its annual dividend of 8.8p per share equates to a 10.6% yield. Looking at recent years, the dividend has been increasing annually since 2018, even throughout the pandemic.
But past performance is not necessarily a guide to what comes next. No dividend is ever guaranteed — and this one may not last at its current level.
Dividend policy
That is partly because the investment trust has a dividend policy that targets paying out 6% of its net asset value at the end of the prior year. That means that if the European Assets Trust share price continues its weak performance for the rest of 2022, the dividend will likely fall sharply next year.
Its net asset value at the end of August was approximately 96.2p per share. Paying out 6% of that as a dividend would mean each share earning around 5.8p in dividends across 2023. That would be a fall of roughly 34% from the current payout. If the net asset value falls further, the cut could be worse. That said, the opposite is true. If European shares stage a recovery before the end of the year, the dividend could increase again.
However, a policy is only that: ultimately it is up to the discretion of the trust managers to decide what dividend to pay. I expect them to stick broadly to their stated policy, but they may always decide to continue the payout at its previous level if they choose. to. So the current dividend may last, although in the long term to be supportable the trust will need to earn enough from the dividends or sale proceeds it receives from its shareholdings.
Investing in Europe
However, I think the investment trust faces other challenges right now. Primary among those is a recession in some European countries. That could hurt both revenues and profits at some companies in which it has invested.
A weaker pound could also be bad news, although I see it as a double-edged sword. On one hand, it makes it more expensive for the trust to buy euro-denominated shares than before. On the other hand, the value of shares the trust already holds and dividends it receives in euros will now be higher in sterling than was the case before.
Why I’d buy this investment trust
Although there are challenges, I would buy European Assets Trust for my portfolio today if I had spare money to invest.
The yield is attractive and may still be so even after a cut. I am positive about the medium- to long-term prospects for European economies in general and think the trust would give me diversified exposure to them. As a long-term investor, I think the current share price offers me an attractive entry point.
