Some 45 per cent of UK companies had scrapped their dividends by 5 April and the situation is likely to deteriorate. Financial services provider Link Group predicts that in the worst-case scenario UK dividend payments could fall by 51 per cent over the course of 2020. However, investors who rely on their investments for income may still be able to get it from equity income trusts, as we explained in the Big Theme of 3 April, a number of which should be able to maintain dividends for the time being by drawing on their revenue reserves.
But equity trusts are not the only source of income – many investment trusts focused on alternative asset classes such as property, leasing and infrastructure also offer chunky yields. So if you are looking to diversify your income sources you could consider these. But before you invest in trusts focused on these kinds of assets due diligence is vitally important. Not all of them have such hefty revenue reserves as some equity income trusts, and some of these assets have been particularly hard hit by the coronavirus lockdown.
As of 14 April, 16 investment trusts have suspended, reduced or deferred their dividend payments, and all but one invest in alternative assets.
|Investment trust dividend changes since March 2020|
|CEIBA Investments||No year-end dividend for FY 2019|
|Custodian Reit||Two quarterly dividends linked to net rental receipts|
|Empiric Student Property||Dividends suspended|
|PRS Reit||Q3 dividend deferred|
|Regional Reit||Future dividends under review|
|Schroder Real Estate||June 2020 dividend postponed|
|Tritax Big Box Reit||Q1 2020 dividend lower than previous rate|
|Fair Oaks Income||Dividends suspended|
|Marble Point Loan Financing||Dividends suspended|
|TOC Property Backed Lending||April 2020 dividend deferred to May|
|UK Mortgages||Quarterly dividend reduced|
|Volta Finance||28 April dividend cancelled|
|Amedeo Air Four Plus||Dividends suspended|
|DP Aircraft I||Dividends suspended|
|SQN Asset Finance Income||Dividends suspended, but 27 March payment was made|
|UK equity income|
|British & American||Board will not recommend end FY2019 dividend, will monitor 2020 progress|
|Source: Winterflood, as of 14 April 2020|
“The majority of [alternative income trusts] face cash-flow uncertainty and have limited headroom on dividend cover,” warns Conor Finn, an analyst at investment bank Liberum. “Several trusts have suspended dividends in order to preserve liquidity. The share price response has been broadly rational, with the most secure income streams outperforming – although a number of discount opportunities remain.”
Generalist infrastructure trusts have been popular for some time and their appeal has become particularly obvious following widespread equity dividend cuts. These trusts invest in a range of projects including electricity plants and schools, which should continue to provide an income – despite the economic effects of the coronavirus pandemic. This is also the case with renewable energy trusts that generate much of their income from subsidies, although these could be mildly affected in the current crisis due to falls in power prices.
“The infrastructure funds look pretty safe and with the renewables trusts you don’t see a great deal of impact,” says Peter Walls, manager of fund of investment trusts Unicorn Mastertrust (GB0031218018). “Renewable infrastructure trusts face other issues, such as managing the energy price curve, but in general terms they are operating efficiently. There are no labour-intensive operations in areas such as solar power.”
Many infrastructure trusts generate a chunky and reliable income, and some generalist infrastructure trusts we highlighted in the Big Theme of 9 April – Investment trusts and funds to buy on the cheap – such as Sequoia Economic Infrastructure Income Fund (SEQI) are still a good choice. Trusts that hold assets with some government backing also look particularly reliable.
“We think dividends on infrastructure funds with high weightings in private finance initiative (PFI) projects should be relatively robust,” says Iain Scouller, managing director, investment funds research at broker Stifel. “These are BBGI SICAV (BBGI), HICL Infrastructure (HICL) and GCP Infrastructure Investments (GCP).”
Renewable infrastructure investment trust JLEN Environmental Assets Group (JLEN) has well-diversified income sources and little exposure to power prices. Otherwise, Mr Scouller suggests Greencoat UK Wind (UKW), Greencoat Renewables (GRP) and Renewables Infrastructure Group (TRIG).
Income at a price
After selling off, infrastructure investment trust share prices have generally recovered so, once again, they are trading at large premiums to the value of their underlying assets. However, many of these still look cheaper than they had up until recently. The average premium to net asset value (NAV) for generalist infrastructure investment trusts was 9.1 per cent as of 14 April, according to broker Winterflood, down from a 12-month average of 13.4 per cent. And the average premium to NAV for renewable infrastructure trusts was 9.2 per cent, down from a 12-month average of 10.3 per cent.
So be mindful of what you pay for income – as well as the possibility that prices could continue to rise.
“Given the largely illiquid nature of their underlying portfolios, trusts in these sub-sectors have tended to use their credit facilities to make new investments before returning to the market to raise new capital to offset this,” comment analysts at Winterflood. “We foresee a situation in the short to medium term where it takes longer to complete new investments as a result of current circumstances, while the attractiveness of infrastructure grows even stronger to investors against a backdrop of dividend suspensions. While some trusts may still be tempted to tap the market, we suspect that most will be wary of cash drag weighing on returns. [So premiums could] increase to even higher levels in the short term before the usual investment and issuance cycle resumes.”
Selective income exposure
Many other types of income-generating alternative assets have been hit hard by the coronavirus lockdown. “It’s not dissimilar to the equity income story,” explains Mr Walls. “If you have exposure to banks, restaurants, pubs, property, retail, airlines, travel or anything driven by the service side of the economy, you may run into problems.”
Several trusts in the Association of Investment Companies (AIC) Leasing sector buy and lease aircraft, and have suffered because of the massive reduction in travel. Amedeo Air Four Plus (AA4) and DP Aircraft I (DPA), for example, have suspended dividends. And James Carthew, head of investment companies research at QuotedData, notes that while Tufton Oceanic Assets (SHIP) looks better placed for now it could run into problems due to its exposure to global shipping.
Mr Finn warns that the outlook for trusts focused on structured credit is similar.
“Perhaps unsurprisingly, collateralised loan obligation and aircraft leasing trusts have been the quickest sectors to suspend dividends in the current crisis," he explains. "Both sectors have relatively high leverage and near-term cash flow is at risk."
Several debt funds, including Fair Oaks Income (FAIR), have suspended dividend payments.
Caution is also advisable with property trusts due to the difficulties the lockdown has created for this industry. Empiric Student Property (ESP) has suspended dividend payments and Schroder Real Estate Investment Trust (SREI) is deferring a payment scheduled for June.
However, some trusts that invest in specialist areas of these troubled sectors may still be worth considering. Analysts at Liberum argue that BioPharma Credit (BPCR) should hold up well relative to other debt investment trusts because it mainly invests in loans to companies in the life sciences industry secured by cash flows from sales of approved drugs.
“The outlook for future investments is positive as life sciences companies are typically more receptive to issuing fixed income debt when equity markets are weak,” say the analysts at Liberum. “Lending competition is relatively limited due to high barriers to entry and there is a significant capital need for companies in the sector, presenting an opportunity for lenders such as BioPharma Credit to capture attractive returns.”
Rent collection by real estate investment trusts (Reits) has varied considerably, depending on which type of property they have exposure to. Mainstream Reits have struggled to collect rent, but certain property specialists such as Civitas Social Housing (CSH) have managed to operate as normal for now. It generates an income from rental payments from housing associations funded by housing benefits, so has some added security from the element of government backing.
The same logic applies to the healthcare Reits, and Mr Carthew describes Primary Health Properties (PHP), Assura (AGR), Impact Healthcare REIT (IHR) and Target Healthcare Reit (THRL) as “solid names” for income seekers. However, not all of them look cheap. Assura and Primary Health Properties were trading on premiums of more than 40 per cent relative to the value of their underlying assets on 9 April, according to Liberum.
But Impact Healthcare Reit and Target Healthcare Reit were on discounts to NAV so may be more reasonably priced. Impact Healthcare Reit buys and leases healthcare real estate, in particular care homes. Target Healthcare Reit also invests in care homes, but has an emphasis on the development of purpose-built facilities with en-suite wet rooms.
Private equity income
You should think carefully before investing in investment trusts that draw on their capital to fund dividends, especially in falling markets. However, Mr Finn argues that some private equity trusts that fund dividends with their capital may be worth considering.
“Dividends from private equity trusts are financed through realisations and paid out of capital,” he explains. “[But their] balance sheets are much stronger now than during the 2008 financial crisis. Princess Private Equity (PEY) and 3i (III), in particular, are in a strong position to maintain current distributions.”
Princess Private Equity had a dividend yield of 6 per cent on 14 April, according to Winterflood, and traded on a 23 per cent discount to its underlying assets. 3i had a lower yield of 4.9 per cent and traded at an 8.9 per cent discount.