The simple way to beat inflation has been to invest in equity income trusts for the past ten years.
Although they might not deliver the best performance, dividend-focused investment trusts offer a stable base to at least match inflation.
The yield on the average UK equity income investment trust has tended to consistently beat inflation – and if you picked the higher yielding trusts or headed overseas for dividends, you could get CPI and then some.
That stands in stark contrast to savings accounts, which have on regular occasion paid less than inflation – losing savers’ money in real terms.
ONS reported that the Consumer Price Index inflation rate increased from 3.1% to 4.2% in September, and fell to 2.2% in October.
Investors also enjoyed the added benefit of capital growth through the share price returns, in addition to any dividend payments.
Even if you had managed just average performance from the Association of Investment Companies’ UK equity income sector, over the past five years you would have reaped a total return of 41.5 per cent and over the past decade it would have been 140 per cent.
It is roughly equivalent to approximately 7 percent and 9 percent annually.
That’s certainly more than a savings account would have paid, which you would expect as investing in shares involves taking a greater degree of risk.
But bear in mind the UK stock market has been lacklustre compared to others – and those periods include the full-on Covid crash – and that’s not bad.
A trust that invests in stocks and bonds has the benefit of allowing you to keep some money in reserve in order to continue receiving dividends.
And that’s why I’ve long held that a decent UK equity income trust makes a nice solid option for investing to match or beat inflation.
There’s a bit of a problem now though.
Yesterday’s inflation in consumer prices was reported at 4.2 percent. This is likely to increase, while the AIC estimates that the average UK equity income trust yields only 3.7 percentage.
These reliable investments workhorses don’t have inflation-matching payouts.
But then not all of them did anyway – even some big guns.
Contrast, for example, two very well known names: near the bottom of the yield table is Finsbury Growth & Income, with a payout of 1.89 per cent, whereas the closest big trust to the top is City of London with a 4.91 per cent dividend.
The sizeable gap between the two comes from a gap in their strategies, Nick Train’s Finsbury Growth & Income – as the tin suggests – targets both growth and income, while Job Curtis’s City of London is more income-focussed.
The former is also an important member of Dividend Hero club. This select group of trusts has a long history of raising dividends and for which City of London can boast an unbroken 54 year run.
There are other investment trust income sectors where reliable dividends can be found – going global is often good and Asia is regularly tipped – and investors should always avoid too much home bias.
But what’s interesting about the UK income trusts is that they are invested in what is considered a still largely unloved market, but one that analysts suggest is relatively cheap and could be lined up for better times.
Last week, it emerged that JP Morgan’s analysts had changed their tune and switched from being bearish and then neutral, to advising clients to buy UK stocks.
Of course, a rerating for UK shares might not arrive, if it does it won’t be a one-way street, and there might still be better investments elsewhere.
At a time where inflation is rapidly eating away our savings, I am attracted to the triple possibility of a stable dividend from a part of the global market that is potentially undervalued. It is convenient to be close by.
Broker Stifel has just released the following table of investment trusts yielding more than 4 percent