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Where, and why, investment trust yields have shot up

More good news has arrived for dividend aficionados. AJ Bell predicts that FTSE 100 companies should pay out some £85bn this year – pretty much matching a record set in 2018. The blue-chip index is also forecast to yield some 4.2 per cent in 2022, thanks to a combination of dividend increases and share price falls.

Some huge yields are now available on individual stocks, with Rio Tinto (RIO), Persimmon (PSN) and Glencore (GLEN) all trading on 2022 yields that reach into double-digit territory. But it’s worth emphasising that bumper yields, tempting as they might look, always have the potential to indicate a value trap. A high yield is not necessarily a screaming buy if, for example, it has been driven by a collapsing share price. In the context of that note of caution, which applies to the investment trust sector as much as it does to individual companies, some income plays are starting to stand out.

If we look at Association of Investment Companies (AIC) data from 11 July there’s a real mixture of different options on offer, each with their own idiosyncrasies. To start with a name especially high up the yield rankings (ignoring VCTs), structured finance play Fair Oaks Income (FAIR) has seen its already lofty payout rise to 17.7 per cent after a year that has seen shareholders endure an 11.9 per cent loss. BioPharma Credit (BPCR), which invests in debt secured against cash flows derived from the sale of approved life science products, is on a 7.5 per cent yield after an arguably modest 4.9 per cent 12-month loss. Turning to better known forms of debt, CQS New City High Yield (NCYF), which backs some riskier bonds, came with an 8.6 per cent yield as of 11 July after a 2.4 per cent loss over the past year. These losses are smaller than those seen for most equity funds, but there is no guarantee that the relative resilience of these parts of the fixed income universe will last.

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