The investment trusts that could beat savings rates by paying 5%-plus dividends

Investors had a tough time working out how to make money in 2023.

Uncertainty over the global economy and continuing geopolitical tensions meant that for many the prospect of stock market investing proved very much hit and miss.

Ironically, backing shares paid off despite the worries, with the MSCI World stock market index up 24 per cent, driven by gains from the Magnificent Seven in the dominant US stock market.

Nonetheless, the temptation to take money out of the stock market and put it into high interest savings accounts was strong, particularly with some of the best fixed rate savings deals paying more than 6 per cent.

But those rates are gone now and the top one-year fixed rate deal in This is Money’s independent best buy savings tables pays 5.3 per cent, with rates on a downward trajectory.

Looking for income?: 48 investment trusts have a divident yield of over 4% according to new research from the Association of Investment Companies 

Meanwhile, looking at the bigger picture, investing in the stock market has been proven to bethe best path to accumulating long-term wealth.

As markets hope for interest rate reductions in 2024, investors will be starting to think about how to invest for income and capital growth over the long term.

Enter investment trusts – and as savings rates dip, these are looking more attractive.

There are 48 which invest mostly in equities and have a dividend yield of at least 4 per cent, delivering both potential growth and income to investors, research from the Association of Investment Companies shows.

 A total of 28 yield 5 per cent or more, so they could deliver an income in excess of interest rates if they start to fall this year.

There are 28 investment companies which have a dividend yield of 5% or more

Fourteen of the trusts on the 28-strong list are from the UK Equity Income sector, accounting for nearly a third of the highest yielding investment trusts.

The trust with the highest dividend yield is Henderson Far East Income. It invests in Asia Pacific equities and yields 11.5 per cent. Managed by Janus Henderson, it is trading on a 4.5 per cent discount to the value of its net asset value.

Next on the list is Marwyn Value Investors which has a yield of 10.8 per cent and sits in the UK Smaller Companies sector. Managed by Marwyn Investment Management, some of the trust’s holdings include luxury goods companies, such as Le Chameau and software companies like AdvancedAdvT Limited.

Another trust in the top three high-yielders is British & American, which invests in global equities and yields 9.2 per cent.

As UK inflation unexpectedly rose again for the first time in 10 months to 4 per cent, the Bank of England may cut rates later than previously expected.

Some investment trusts have a focus on providing a generous income to investors and the structure of investment companies is a big benefit when it comes to this.

They allow investment managers to hold back up to 15 per cent of the dividends they receive each year from the companies they invest in and build a revenue reserve to smooth payouts in leaner years.

Eight of the highest yielding investment trusts are what the AIC calls dividend heroes, which means they have raised their dividends for at least 20 years in a row.

The highest yielding of these dividend giants is abrdn Equity Income Trust, which has raised its dividend for 23 years and offers a 7.7 per cent yield.

There are a further 13 trusts which have increased their dividend for ten years in a row.

Why investment trusts?

Investment trusts are a popular way for investors to get exposure to stock markets for all kinds of reasons.

They are easy to buy and sell, especially through an online investment platform.

They are managed by an investment manager steeped in market knowledge, hold a range of stocks (diversifying risk) and are not too greedy when it comes to charges.

Investment companies also have structural benefits which help them maintain and grow their dividends year after year. But even with all these compelling factors, there is no guarantee that they will guarantee positive returns year in year out.

Annabel Brodie-Smith, communications director of the AIC says: ‘For investors seeking income, this list of high yielding equity investment trusts is a good place to start.

These investment trusts offer access to equities in a wide range of regions and sectors from the UK and across the globe including commodities, infrastructure and biotechnology.

‘More than a third of these 48 investment trusts have raised their dividends every year for the past ten years, and eight have raised their dividends for 20 years or more.’