Even though inflation dropped back to 2.6% last month, its overall trajectory seems to be an upward one. The impact of Brexit is still being felt via a weak pound, with sterling depreciating recently versus the euro. This is causing inflation to increase and, with Brexit talks apparently stalling, the outlook for the pound seems to be relatively downbeat.
As such, buying investment trusts which offer a high dividend yield could be a shrewd move. Here are two trusts that could beat inflation – even if it continues to move higher over the medium term.
The two investment trusts in question are Dunedin Income Growth (LSE: DIG) and the Murray Income Trust (LSE: MUT). They have dividend yields of 4.5% and 4.1% respectively. This means they are at least 150 basis points ahead of inflation at the present time. Even if the rate of growth of prices increases above 3%, they are very likely to deliver a real income return for their investors.
In addition, they both trade at a discount to their net asset values (NAVs). Dunedin Income Growth has a discount of 9%, while the Murray Income trust’s discount is around 7%. These figures suggest they may offer good value for money, with their share price growth of 9% and 6% respectively during the last six months showing they are able to perform relatively well versus their benchmarks.
Both trusts could help investors to counter the threat of inflation, not only through their current dividend yields, but also because of the companies they are invested in. While they generally hold UK-listed shares, the companies they own shares in have significant international operations. This may enable them to benefit from higher growth rates outside of the UK economy, as well as a weaker pound.
If sterling depreciates further then it would be unsurprising for both trusts to deliver improved share price performance. Dividends and share price valuations within the fund could gain a boost from currency fluctuations and this may lead to improved total returns for investors. And with international diversity comes a lower risk profile. This may help investors to overcome the potential risks from Brexit over the medium term.
Looking ahead, investment trusts focused on income could see their valuations come under pressure from a rising interest rate. If inflation continues to be relatively high then the Bank of England may seek to tighten monetary policy to some degree in order to cool-off rising prices. In such a scenario, other asset classes such as bonds may become relatively more attractive for income investors.
However, with the UK economy continuing to face an uncertain outlook, the prospect of a sustained interest rate rise seems unlikely. With diverse holdings, discounts to their NAVs and above-inflation income yields, Dunedin Income Growth and the Murray Income Trust seem to be worthwhile buys for the long term.
Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.