There are a number of investment trusts that offer an attractive combination of both dividend income and capital growth. This is because following a rule change in 2012, UK investment trusts now have the ability to pay dividends out of capital profits. This means that they can invest in traditionally lower-yielding sectors, which may offer better than average growth prospects, and meet shareholder demand for income in the current rate environment.

UK smaller companies

One option is the Invesco Perpetual UK Smaller Companies Investment Trust (LSE: IPU). Aside from its dividend yield of 4%, this fund is a classic equity investment trust that holds a diversified portfolio of small to medium-sized UK quoted companies.

Unlike equity income funds, which invest primarily in higher-yielding stocks, this fund does not prioritise higher-yielding companies over lower-yielding ones. Instead, it remains focused on identifying what the managers regard as quality businesses with strong balance sheets.

But following a change in its dividend policy in 2014, it has used its capital reserves to supplement its dividend payments, in order to enhance its dividend yield. As such, the income earned by the portfolio in the form of dividends affords just roughly half of the investment trust’s yield.

Top performer

The fund is a top performer in the small-cap equity space and has been consistently beating the performance of its benchmark in recent years. It has a five-year total return of 50%, which compares favourably to the benchmark Numis Smaller Companies ex-Investment Companies Index’s gain of 28% over the same period.

Industrials is its biggest sector exposure, representing 33% of its total assets, and this is followed by consumer services, which accounts for a further 19%. The top five holdings in its portfolio include Coats, Clinigen, Consort Medical, Robert Walters and 4imprint.

Biotechnology

The biotechnology sector has been one of the hottest investment areas over the past decade, and many stocks have delivered incredible profits for investors. However, it’s an equity space which offers very low yields, with very many companies not offering any dividends whatsoever.

The International Biotechnology Trust (LSE: IBT) is one way to get around this issue. This investment trust offers a current yield of 4.1%, via the use of capital reserves to top up its dividends.

Unsurprisingly, its past performance is impressive. Over one-, three- and five-year periods, the biotech fund has returned 14%, 25% and 170%, respectively. However, past performance is no guarantee of future returns and it’s important to consider other factors as well.

Currency risk

Investors should also be wary about the impact of currency fluctuations on capital values. As US large-caps dominate its portfolio, and the underlying firms earn most of their revenues outside of the UK, the fall in the value of the pound in recent months has boosted the sterling valuation of its underlying investments.

Should the pound recover from such lows — perhaps from progress on Brexit negotiations, then the rise in the value of the pound would hurt capital growth in the future.

The post Have £1,000 to invest? Consider these high-yield investment trusts for both dividends and growth appeared first on The Motley Fool UK.

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Jack Tang 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.

This is why small-cap focused investment trusts are a great tool for investors who want to benefit from small-cap growth but don’t have the time or experience to do the work themselves.

Returns of 1,000%

Standard Life UK Smaller Companies (LSE: SLS) has chalked up one of the best records around when it comes to small-cap investing. Over the past five years, the trust has produced a total return of 115% for investors, compared to its benchmark (UK Smaller Companies) return of 107% over the same period.

The trust’s manager, Harry Nimmo is somewhat of a legend in investment circles having managed the Smaller Companies Fund since 2003, achieving a total return for investors of nearly 1,000% since the beginning, which makes him even more successful than City grandee Neil Woodford. 

Nimmo likes growth companies, so you won’t find any value investments in his portfolio. He likes to own shares that have performed well and continue to produce returns such as First Derivatives and NMC Health, two of the fund’s top 10 holdings.

The one drawback of the Standard Life UK Smaller Companies is that it is relatively expensive with a total ongoing cost to investors of 1.1% per annum, and its dividend yield leaves much to be desired, currently standing at 1.3%. Nonetheless, after considering the company’s historic performance in the small-cap sector, I believe that this is a price worth paying to invest alongside Nimmo.

Value focus 

Another small-cap focused trust that’s smashed its benchmark return over the past five years is the Invesco Perpetual UK Smaller Companies (LSE: IPU). Jonathan Brown manages the portfolio here, and once again he’s been at the helm for well over a decade since starting in June 2002. Over the past five years, the firm has returned 139% for investors, compared to the benchmark return of 107%.

And as well as this stronger performance, the trust is also attractive to income investors as it currently supports a dividend yield of 3.4% and its portfolio is more value-focused with Coats and Johnson Service featuring in the top five holdings. With a total ongoing cost of 0.8% per annum, the Invesco offering is also cheaper than Standard Life’s.

That being said, while Invesco might look like the better offering based on short-term performance, over the long-term its performance is less appealing. Over the past decade, the trust has produced a total return for investors of 231%. Meanwhile, Nimmo and team have returned 327% over the same period, excluding dividends.

However, past performance is no guarantee of future returns and either trust would make a great addition to any portfolio. A combination of the two would provide an instantly diversified portfolio of the market’s top small-caps.

The post Hungry for growth? Consider these growth-focused investment trusts appeared first on The Motley Fool UK.

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• Are Greggs shares 50.3% undervalued?
• Around £5 now, here’s why this FTSE banking giant looks a bargain buy anywhere below £12.67
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Rupert Hargreaves owns no share 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.