2 dirt-cheap dividend investment trusts yielding more than inflation

These two investment trusts have high real yields.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Growth potential

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.

Income outlook

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.

Possible risks

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »