Invest with these income trusts and you could be picking up dividends at a bargain price

Own It: Hipgnosis has snapped up several of Stormzy’s hits but is now selling some catalogues

National Savings & Investments (NS&I) has mostly avoided controversy during its 162-year history.

But the Treasury-sponsored institution has shamed the banks – and made private investors consider their options – with the launch this month of its Guaranteed Growth Bonds and Guaranteed Income Bonds.

Both pay a fixed rate of 6.2 per cent – better than anything available from the High Street banking names. Also a 100 per cent guarantee covers every penny entrusted to NS&I. You can shield a chunk of your cash in this safety-first option which gives you scope to explore more adventurous long-term income opportunities.

Some of these lie in the investment trust sector which also has its beginnings in the Victorian era of thrift.

At present, some income trusts offer dividend yields of 4 per cent-plus. Partly as a result of higher interest rates, their share prices are at a deep discount to the value of their net assets, making them an attractive growth prospect.

If a trust is at a 10 per cent discount, you are getting £1 worth of shares for 90p. This could turn out to be a bargain, if you are ready for a gamble.

Nick Wood, head of fund research at wealth managers Quilter Cheviot, highlights Murray Income Trust, which is currently trading at a discount of 9.04 per cent, with a 4.6 per cent yield.

He says: ‘The trust, which has just celebrated its 50th successive year of dividend increases, invests in higher-quality UK companies. Performance has been slightly weaker in the past three years, but we have conviction in its manager Charles Luke to perform well going forwards, as our home market looks relatively cheap.’

Diverse Income represents another bet on UK market revival. The trust, which yields 5 per cent and is at an 8.11 per cent discount, holds a mix of businesses, including the £18.75billion supermarket giant Tesco and the £166million travel operator Hostelworld.

In the news: This week Hipgnosis said it would sell some catalogues

Its managers, Gervais Williams and Martin Turner, believe the prospects for the trust’s strategy are the greatest they have been for 30 years.

‘Alternative’ income trusts that invest in areas such as ‘big box’ logistics, infrastructure projects, pop music rights and renewable energies have been particularly hard hit by interest rate rises. 

As a result, some stand at discounts of 30 per cent or more. Wood cites as one example the International Public Partnerships Trust which invests in high-quality infrastructure projects in the UK, the US, Australia and Europe, earning inflation-linked revenues from some.

He says: ‘This trust – which is at a 17 per cent discount – is among our highest convictions. The yield is a little over 6 per cent.’

The depth of the discounts has sparked talk of trust mergers which could narrow the discounts.

There is also bid speculation. The £460million Round Hill Music Royalty trust, which holds rights to the hits of Alice Cooper, Bruno Mars, Louis Armstrong and others, is be acquired by Alchemy, a US company.

The deal sparked a 61 per cent rise in Round Hill Music’s price. Some observers claim that the next target could be the £1.2billion Hipgnosis trust – its artists include Blondie, Stormzy and Ed Sheeran –although the brokers Jefferies contends that its size is an obstacle. This week Hipgnosis said it would sell some catalogues, but this statement further increased the discount to 41.8 per cent.

Ben Yearsley, of Shore Financial Planning, says concerns over valuations have widened the discounts on renewable energy trusts, overshadowing their inflation-proofed revenues.

Yearsley says: ‘Take for example, Downing Renewables & Infrastructure, which yields 5.88 per cent and is on a 25 per cent discount. It invests in hydro and solar and has this year acquired a grid network in Sweden.

‘Harmony Energy Income Trust, which focuses on battery storage projects, like the Bumpers Solar Farm in Buckinghamshire, last week sold one of its holdings at above asset value which ought to allay some fears about valuations. It stands at a 24 per cent discount and yields 9 per cent.’ 

GCP Infrastructure has an even wider discount of 34.8 per cent – and yields 9.8 per cent. This will raise eyebrows, but Matthew Read, at the analytics group QuotedData, points to the trust’s inflation-proofed revenues from its portfolio of UK infrastructure debt.

Read says that the Abrdn European Logistics Income trust is at 30.8 per cent discount despite strong demand for its ‘big box’ logistics and ‘last mile’ urban warehouses.

This trust is my alternative income pick. I believe the market’s perception of its prospects is overly pessimistic. I would be happy to have money in these assets, even if they were not discounted.

I have also put savings into NS&I’s new bonds which require you to lock your cash away for a year. There is no certainty that income trusts’ share prices will rebound by next autumn, but therein lies the excitement of investing.