All I want is an investment trust on a juicy discount…

Investment trust discounts, under the right circumstances, could provide investors with significant return potential…

Josef Licsauer

Updated 18 Dec 2024

Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

Picture a bustling British high street during a Boxing Day sale. Shoppers eagerly queue for bargains, drawn by the irresistible allure of a good deal. It’s quintessentially British to love a discount—whether it’s a half-price Greggs sausage roll or the Black Friday sale frenzy borrowed from the US. This passion for bargains extends beyond the aisles and into the world of investing. Here, discounts on investment trusts evoke a similar thrill: the opportunity to buy £100 of assets for £80. Who could resist?

But, as with any sale, not all bargains are created equal. Discounted trusts can offer significant upside if their share prices recover, but they also can signal significant risks. This raises a question: has investing in the most discounted trusts over the years been an effective strategy for delivering meaningful returns? In pursuit of this answer, we dove headfirst into the bottomless well of data, beginning with a broad analysis of how discounts in the investment trust universe behave during market cycles, before looking at those trading on the very widest discounts.

Extreme discounts

For some investors, discounts represent a compelling opportunity to capture additional upside, but they can also reflect market sentiment, management quality, and sector challenges, introducing another potential layer of risk for investors. At extreme levels, we believe that the widest discounts often carry a warning to investors, signalling a need for caution rather than opportunity.

A deep analysis of historical data reinforces this point. Our analysis shows that trusts trading at the steepest discounts, mostly those over 50% have invariably delivered negative share price returns in subsequent one- and three-year periods. These extreme discounts may stem from significant underlying issues, such as management struggles, sector-specific headwinds, or the obsolescence of an investment focus. The result tends to be persistent poor performance, making a strategy of chasing the deepest discounts a hazardous proposition. Blindly pursuing these perceived bargains can lead to bitter disappointment and we show the results of buying trusts on the widest discounts with a pure dartboard approach in the table below. It is not happy reading!

Widest discounts compared to one and three-year performance

Year	Trust with the widest discount at the start of the year	Discount (%)	One-year cumulative return (%)	Three-year cumulative return (%)
2005	Tiger Royalties and Investments	-35.8	30.9	52.3
2006	Athelney Trust	-23.4	23.9	-38.6
2007	Seed Innovations	-89.8	40.9	-57.8
2008	Seed Innovations	-91.8	-31.0	-88.1
2009	Eurocastle Investment	-97.2	-93.1	-95.2
2010	Tiger Royalties and Investments	-72.9	-9.2	-52.9
2011	DCI Advisors Limited	-77.1	-19.5	-54.8
2012	DCI Advisors Limited	-85.3	-35.5	-44.3
2013	Livermore Investments	-62.6	-3.0	3.9
2014	DCI Advisors Limited	-52.9	-0.9	-71.8
2015	DCI Advisors Limited	-67.2	-42.5	-75.4
2016	GRIT Investment Trust	-82.4	-11.3	-86.5
2017	Alternative Liquidity Fund	-76.9	-40.0	-51.2
2018	DCI Advisors Limited	-62.1	-15.8	-21.1
2019	Alternative Liquidity Fund	-54.4	-3.3	-44.5
2020	DCI Advisors Limited	-75.0	-6.3	-25.0
2021	DCI Advisors Limited	-77.7	-26.7	-13.3
2022	Tetragon Financial	-69.6	1.0	N/A
2023	Seed Innovations	-70.0	-12.4	N/A

Source: Morningstar. N/A – unavailable given the rolling three-year return data range.

Past performance is not a reliable indicator of future results

One can only apologise for the volume of data below, but to help provide further context, we’ve also plotted the average one- and three-year rolling returns of the 20 widest discounted trusts each year against the FTSE All-Share. Whilst this isn’t the fairest of comparisons for performance in all cases, we think it is a useful benchmark for the investor looking for bargains in the UK market to consider. Whilst there were years where the trusts outperformed, such periods accounted for only 36.8% of one-year periods and 21.1% of three-year periods, between 2005 and 2023. This helps reinforce our analysis that buying trusts with extremely wide discounts is a high-risk strategy. Deep discounts often signal structural or irreparable issues, and should serve as a warning to investors to tread very carefully.

So, where does this leave investors wanting to take advantage of discounts? A sensible starting point, in our view, is avoiding the deepest discounted trusts and instead focussing on trusts trading at more moderate discounts, supported by positive tailwinds and a higher quality portfolio. These may still trade at wider discounts than their historical averages but could present a better balance of risk and reward.

To test this theory, we revisited the data, this time excluding trusts trading at discounts wider than 40%. The results were telling. In every year except 2005 and 2006—when no trusts traded wider than a 40% discount—average one- and three-year returns improved significantly. By plotting the data in the same way as before, we found that these trusts (the 20 widest, excluding those above 40%) outperformed the FTSE All-Share on 57.9% of occasions over one year and 36.8% over three years. This is a substantial improvement over the performance of the very widest discounts above, but still underlines the point that just picking wide discounts won’t necessarily lead you to a good result.

Discount comparison (excluding 40%+)

Year	Widest discount (%)	Avg discount (over 20 widest trusts %)	Avg one-year TR (%)	Avg three-year TR (%)
2005	-35.8	-21.1	27.6	67.9
2006	-23.4	-15.5	20.7	-14.5
2007	-34.1	-16.0	1.2	-15.8
2008	-37.7	-28.7	-24.2	-19.2
2009	-37.1	-28.9	46.6	75.4
2010	-39.4	-31.6	17.0	30.7
2011	-39.7	-29.1	3.0	12.6
2012	-39.7	-33.3	1.4	29.1
2013	-39.9	-29.0	9.0	20.0
2014	-36.2	-30.3	6.7	33.3
2015	-39.9	-30.0	-0.4	30.3
2016	-37.8	-30.2	23.5	39.6
2017	-39.0	-31.4	11.2	14.0
2018	-39.9	-28.3	-6.3	1.2
2019	-37.9	-27.7	11.1	51.4
2020	-38.3	-30.6	7.5	1.3
2021	-39.5	-34.4	18.7	21.2
2022	-39.7	-32.4	-4.7	N/A
2023	-39.5	-35.3	3.3	N/A

Source: Morningstar. N/A – unavailable given the rolling three-year return data range.

Past performance is not a reliable indicator of future results

Investing in discounted trusts always comes with a risk, even those at relatively moderate discounts, that they may persist for years. Discounts can also widen further, driven by factors such as weak relative performance, illiquid shareholder registers, or even sector-specific pessimism. However, we think the key is avoiding trusts hampered by structural challenges, as these will likely erode future returns or those with poor corporate governance.

This is why we believe it’s important for investors to focus on trusts that are supported by an array of strong fundamentals, like experienced management and a well-resourced investment team that can add an edge when it comes to stock selection, or trusts benefitting from favourable sector trends. My colleague recently advocated a similar case for trusts in the alternative income sector.He argues that there is a risk of falling into ‘value traps’. He concludes that the focus should be on quality trusts, that have been unfairly derated alongside their lower-quality peers, and focussing on those that exhibit resilience rather than being swayed purely by the allure of a wide discount.

Many factors can play a role in narrowing the discount meaningfully over time, or even shifting a trust to a premium rating. In the right environment, we think that patient, long-term investors that incorporate the analysis of discounts into their investment decisions, rather than being solely guided by them, could unlock compelling return potential.

Opportunities in today’s market

History may not repeat, but it often rhymes, much like stock market cycles. After enduring a series of seismic events over the past few years, including Brexit, the pandemic, a reversal in globalisation, conflicts in Europe and the Middle East, surging inflation, and political instability, we believe certain sectors, and indeed the trusts aligned with them, now offer compelling opportunities for investors.

One particularly interesting area is technology. Semiconductor stocks, and semiconductor-related stocks, fuelled by soaring demand from artificial intelligence (AI), have performed exceptionally well over the last couple of years, which has, in turn, rendered the sector seemingly expensive. Investment trusts like Allianz Technology Trust (ATT) have benefitted significantly from the AI surge, driving performance across its portfolio, and delivering a NAV total return of 40.0% over the past 12 months. Yet, or perhaps because of this, ATT currently trades at a discount of around 10.0%, wider than its average over five years of 7.1% and the sector’s average of 8.0%. As such, it offers investors exposure to market-leading tech giants, such as NVIDIA and Microsoft, at a 10% discount to their market value. Beyond the titans, ATT also provides exposure to differentiated large- and mid-cap stocks with significant growth potential, further diversifying its return profile.

We believe this valuation gap represents a clear opportunity to tap into one of the most dynamic sectors in global markets. We see potential in ATT’s double-digit discount narrowing, potentially delivering an extra uplift to investor returns as it does.

Looking through a slightly different lens, Fidelity Emerging Markets Limited (FEML) presents a potentially compelling opportunity for investors seeking both emerging market and tech exposure. The trust’s managers have built up strategic positions in Taiwanese and South Korean stocks over time, particularly those heavily integrated into the global technology supply chain and enablers of AI. Familiar names like TSMC and Samsung stand out as obvious beneficiaries, given their dominant market positions and global reach. However, the managers have also identified opportunities in lesser-known companies, such as SK Hynix, a leader in semiconductor memory, and their new 2024 portfolio addition, Elite Material. The latter, a Taiwanese manufacturer of copper-clad laminate—an essential input for printed circuit boards—is well-positioned to benefit from surging AI-related demand.

Similarly to ATT, FEML has performed well over the past 12 months, delivering NAV total returns of 20.1%, ahead of its benchmark, yet trades at a discount of 13%, wider than both its five-year average and the sector. With exposure to multiple growth trends within emerging markets, we see the potential for FEML’s discount to narrow, rewarding patient investors over time, although we expect there to be plenty of uncertainty in the short term, depending on the outcome of US tariff decisions.

Beyond technology, private equity discounts look potentially interesting. Below, we’ve highlighted average discounts from a selection of key players in the space, comparing them to the wider sector average. Notably, three out of the five trusts trade at discounts wider than the sector, and their own ten-year average, presenting a potential opportunity in our eyes. Broadly speaking, the market derated in 2020, causing discounts to widen dramatically. This impacted investment trusts, especially those like private equity trusts, which tend to be less liquid and harder to sell during market selloffs. Since 2022, discounts have largely been narrowing, though, and looking ahead to 2025, we believe some of the headwinds that have weighed on private markets are beginning to ease, creating a potentially attractive entry point at current discount levels.

Private equity discounts

Private equity trusts	Current discount (%)	Five-year average (%)	Ten-year average (%)
HVPE	-38.6	-33.5	-26.6
PIN	-30.7	-31.8	-25.4
CTPE	-29.3	-27.3	-19.1
NBPE	-23.6	-28.4	-24.7
HGT	-0.3	-7.9	-8.8
Morningstar Investment Trust Private Equity ex 3i	-24.1	-24.9	-20.9

Source: Morningstar

Past performance is not a reliable indicator of future results

The most immediate catalyst for discounts narrowing is, in our view, an improvement in realisation activity. An improvement in dealmaking and exit conditions has been anticipated for much of 2024, driven by recovering macroeconomic conditions and a more favourable interest rate environment. So far, significant realisation activity has yet to materialise. HarbourVest recently commented that they are seeing a narrowing of the valuation gap between buyers and sellers in private equity, which they believe will lead to a “further pick-up in deal activity in 2025”.

In our view, these dynamics point to the potential for narrowing discounts on private equity trusts, alongside improved investor confidence. HG Capital Trust (HGT) which has a five-year average discount to NAV of 7.9% shows that a persistently wide discount to NAV is not necessarily guaranteed. HGT has benefitted from being in the technology space and delivering outstanding long-term NAV returns. Some trusts in the sector, particularly Pantheon International (PIN), have taken decisive action on buybacks and setting formulaic capital allocation policies. PIN’s discount has narrowed as a result, although there clearly needs to be a balance struck between buybacks and balance sheet strength in the face of the potential for realisation activity to remain muted. Trusts like CT Private Equity (CTPE), which offers exposure to a diversified portfolio of ‘lower mid-market’ private equity-backed companies, and HarbourVest Global Private Equity (HVPE), with a portfolio encompassing over 1,000 businesses ranging from hyper-growth startups to stable, cash-generative companies, both trade on discounts significantly wider than their ten-year averages. If sentiment returns to the sector, we think these trusts in particular could see their discounts tighten.

Outside of market trends and economic tailwinds, some investment trusts may see a narrowing of the discount thanks, in part, to decisive board actions. In recent years, investment trust boards have become increasingly proactive, not only by buying back shares to manage discount volatility but also by implementing strategic measures aimed at narrowing discounts more meaningfully. A prime example is Schroder Japan (SJG), which invests primarily in listed Japanese equities. Despite outperforming its benchmark over the past 12 months, the trust continues to trade at a discount wider than its five-year average, prompting the board to act.

To enhance its appeal with investors, differentiate it from peers in the Japan sector, and position the trust as a strong option for income-seekers looking beyond their traditional income-hunting grounds, the board unveiled an enhanced dividend policy aimed at paying out 4% of the average NAV each financial year. Additionally, it announced a performance-conditional tender offer: if the trust fails to at least match its benchmark performance over the five-year period starting 31/07/2024, the board will propose a 25% tender offer, allowing shareholders to exit a portion of their investment at NAV, less costs.

Since the announcement, SJG’s discount has narrowed. We think these measures not only show conviction in the abilities of manager Masaki Taketsume, but also provide a clear incentive to continue delivering alpha, and at the same time, have broadened the trust’s appeal as an alternative income option. This, together with providing investors access to the exciting developments ongoing in Japan, leads us to think there is potential for its discount to narrow further.

Conclusion

Discounts in investment trusts present both opportunities and challenges. Whilst the allure of trusts trading at the absolute widest discounts may tempt investors, the historical data underscores the dangers of chasing these seemingly deep bargains. Discounts often reflect more than undervaluation; they can signal genuine structural or sector-specific challenges that hinder recovery.

Additionally, our analysis of 20 years of market data, examining rolling three-month returns from three major indices—the FTSE All-Share, MSCI Europe ex UK, and the S&P 500—alongside the discount movements of investment trusts revealed a striking pattern. During periods of sharp volatility—such as the 2008/09 financial crisis, Brexit, or the coronavirus pandemic—investment trust discounts widened significantly. However, unlike equity markets, which often rebounded within 12 months, average discounts across the sector frequently took years to recover. We think this lag, particularly pronounced in sectors like property, private equity, and infrastructure, reflects the slower adjustment of private asset valuations and heightened investor risk aversion during turbulent times.

Rolling returns versus discount movements

Source: Morningstar

Past performance is not a reliable indicator of future results

Whilst investing in a discounted trust may lead to strong returns over time, investors will have to get comfortable with the fact it may take more time to bounce back, despite strong performance from equity markets. Moreover, some trusts may face structural barriers that actually prevent their discounts from narrowing, potentially eroding returns over time. As such, focussing on quality trusts with moderate discounts, supported by positive tailwinds, may yield stronger results, in our view. By understanding the reasons behind a discount and the factors that might support its narrowing—such as portfolio quality, strong management, or exposure to structural growth trends—investors who look beyond the headline figures and incorporate discount analysis into broader investment decisions, rather than being solely guided by them, could unlock significant returns, often unavailable in open-ended funds.

A long-term perspective is essential. By examining the drivers behind a trust’s discount, identifying catalysts for potential narrowing, and ensuring alignment with personal investment goals, investors can better navigate the sales racks of the investment trust world. The rewards lie not in impulsive decisions but in uncovering opportunities that can stand the test of ti

How much can a £100,000 pension pot give you in retirement?© GB News

Story by Temie Laleye

A £100,000 pension pot can now secure a significantly higher retirement income through annuities compared to recent years.

With the Bank of England expected to cut interest rates further in 2025, now may be the best time to secure a quote and see how much you could get.

Three years ago, the same pension saver would have received just £5,131.

Annuity rates change regularly, and quotes are only guaranteed for a limited time, so they could be higher or lower in the future.

The exact income one could receive will depend on the value of their pension, their personal details and the options they choose.

Pension folder© GB News

Matt Sheach, financial consultant at Lumin Wealth, said: “With annuity rates offering good value for money over the past couple of years, savers may opt to lock into an annuity, with the anticipation that rates will fall over the coming months and years, in light of expected interest rate drops

A total of 82,061 annuities were sold in 2023/24, up 39 per cent compared to a year earlier, according to the Financial Conduct Authority (FCA).

Annuities could get a further boost due to the Budget announcement that pension pots will be liable for inheritance tax from April 2027.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “This will remove many people’s rationale for using income drawdown as they used it to pass the pension down generations tax-efficiently rather than draw an income from it.

“As they revisit their retirement income plans, many may opt to secure a guaranteed income through an annuity instead.”

Older people can often access higher annuity rates

The Bank of England held interest rates at 4.75 per cent in December – following two falls in 2024.

One of the main restrictions of annuities is that people are stuck with the rate they get once they purchase the product.

Timing is important and it’s good to get a sense of whether rates are due to rise or fall whenever you’re considering an annuity purchase.

Lily Megson, the policy director at My Pension Expert, cautioned: “Inflation is proving sticky, and while the base rate is predicted to drop throughout 2025, the Bank of England will not rush these decisions.

“Savers, particularly those nearing retirement, will need to consider the coming year and factor in fluctuating interest rates as they pursue their financial goals.

“Some people may be considering taking advantage of higher interest rates in the short-term, while others might be contemplating longer-term options for growing their pension pots. Importantly, however, these are not decisions they should have to make alone.”

£££££££££££££££

This year’s fcast for the Snowball is £9,120.00 and the target 10k.

Remember if you re-invest your dividends at 7% pa your income doubles every ten years. Did I mention you also keep all your capital ?

Income earned

2023 £9,422.59

2024 £10,996.00

A yield of 11%, remember if u can compound your dividends at 7% pa, your income will double every ten years.

No savings? I’d use the Warren Buffett method to earn lifelong passive income

Story by Christopher Ruane

 

When it comes to passive income,  Warren Buffett is a one-man masterclass. His company Berkshire Hathaway earns billions of pounds a year for doing precisely nothing, beyond owning shares in known success stories such as Apple and Coca-Cola (NYSE: KO).

Here are three elements of his ideology I would employ as I try to build large income streams without working for them.

Do less, but better

Buffett has said his success is largely down to one really good investment every five years or so. He also says that if you would not consider holding a share for 10 years, you should not consider owning it for 10 minutes.

That is because he believes in long-term investing, based on finding brilliant companies selling at fair prices and then letting time work its magic.

But unlike some investors who take a scattergun approach and hope that some of their investments do spectacularly well, Buffett waits patiently for what he sees as an excellent opportunity and then goes into it in a big way.

I think investing in just a few great income shares could help me improve my long-term performance compared to buying lots of merely good ones.

Look at the source, not the current results

One common mistake people make when looking to earn passive income by owning shares is focusing on the current dividend yield.

I see that as a mistake because dividends are never guaranteed. Just because a company has an attractive yield today does not necessarily mean it will stay that way. After all, it may cancel its dividend.

Something that has helped Buffett in his investing career is understanding what really drives value. He does not look at what a company does now so much as what it has the potential to do over the course of decades to come. That helps him invest in firms that can potentially grow their profits – and their dividends.

Compound, compound, and compound again

An example is Coca-Cola. It is what is known as a Dividend Aristocrat, having raised its dividend annually for over seven decades. How is Coca-Cola able to do that?

That has helped give it pricing power which, in turn, can help profits.

Can that continue? One risk I see is consumers turning away from sugary drinks, potentially hurting sales. But, like Buffett himself, Coca-Cola has taken timeless business principles and applied them consistently, while moving with the times.

Buffett’s stake in the company generates hundreds of millions of pounds annually in dividends. But Berkshire does not pay dividends. Instead, it reinvests what it earns.

That is known as compounding – and could help me build my passive income streams over time even if I do not invest more money.

The post No savings? I’d use the Warren Buffett method to earn lifelong passive income appeared first on The Motley Fool UK.

20 highest-yielding FTSE 100 shares in 2024

Banks and insurers packed the biggest dividend punch for income investors in 2024, while last year’s top-yielding FTSE 100 company has fallen down the rankings.

31st December 2024

by Graeme Evans from interactive investor

Dividend yields of 9% and above at four stocks including HSBC Holdings 

HSBA

 and Legal & General Group 

LGEN

made banking and insurance the standout sectors for investors seeking income in 2024.

Long-term savings and retirement business Phoenix Group Holdings 

finished the year with a forward yield of 10.7%, the highest in the blue-chip index.

Boosted by strong levels of cash generation, the company whose brands include Standard Life and SunLife recently outlined a new three-year strategy that featured a pledge to deliver a progressive and sustainable dividend.

Savings and investment company M&G Ordinary Shares 

 yields dividend income of 10.3% after its share price fell more than 10% and it reiterated a policy of stable or growing shareholder payments.

A tough year for Legal & General after investors gave a cool response to the distribution plans of new chief executive Antonio Simoes has left shares yielding 9.4%. 

He announced £200 million a year of share buybacks and 2% dividend growth starting from next year. Simoes said this represented an increase on the previous policy of 5% growth under predecessor Nigel Wilson, who spurned buybacks in favour of investment.

Rival Aviva 

which this year sweetened guidance so that it now expects the cash cost of the dividend to rise by mid-single digits, trades with a 7.7% yield after a stronger year for shares.

HSBC, which is the third-largest company in the FTSE 100 and the stock with the third-largest forward yield at 9%, had a target payout ratio for 2024 of 50% of earnings. It resumed quarterly dividend payments in 2023 and recently paid a special dividend from the sale of its Canada operations.

The yield of Lloyds Banking Group 

 stands at 5.6% and is the next best in the banking sector. A strong capital buffer meant its half-year dividend grew by 15% to a total of £662 million.

The top ranked in the financial sector compare with the FTSE 100 average of about 3.7%, which is down from 4% last year due to higher share prices and some year-on-year dividend setbacks such as Glencore 

GLEN

 and SSE 

The headline figure still beats November’s inflation rate and the latest average no-notice savings rate of 2.9% but is short of the UK 10-year bond yield of 4.56%.

Yields of 8% and above are regarded as a sign that the market thinks a dividend may be unsustainable, as was the case with the 11% at Vodafone Group 

VOD

 at the end of last year.

This figure has since been reduced to 6% after the mobile phone giant unveiled a new capital allocation framework, which included rebasing the total 2025 dividend to 4.5 euro cents a share.

It had paid nine euro cents on an annual basis since 2020, while in August 2018 the distribution stood at 10.23 euro cents or 9.9p a share.

The new policy was introduced by chief executive Margherita Della Valle after a wide-ranging restructuring that has led to the sale of operations in Italy and Spain and the merger of UK operations with those of Three. 

The cut will be offset by plans for share buybacks worth four billion euros, part of the 12 billion euros of proceeds from the recent disposals.

The return of cash through share buybacks can be a positive move for investors should the impact on earnings per share translate into higher future dividends.

The housebuilding, energy and mining sectors, which have been traditional hunting grounds for investors seeking income, provided only five entries in the top 20.

The highest ranked was Taylor Wimpey 

TW.

, whose dividend yield of 7.6% is underpinned by a commitment to return 7.5% of net assets annually. The shares are down 17% in 2024. The other housebuilder is Berkeley Group Holdings (The) 

BKG

One of last year’s highest-yielding mining stocks has fallen out of the top 20 after Glencore stopped paying top-up dividends in the wake of a major acquisition. That leaves Rio Tinto Registered Shares 

RIO

 as the leading pick, which has a projected yield of 6.6%.

BP 

 shares trade with a yield of 6.5%, having increased its second quarter dividend by 10% to eight US cents (6.05p) a share in September. However, the shares have fallen 19% to a two-year low as City analysts worry about the sustainability of 2025 buybacks.

Property stocks continue to trade with lofty yields as investors are paid to wait for the anticipated improvement in conditions, leaving Land Securities Group on 7%.

Urban logistics-focused LondonMetric Property 

 is not far behind at 6.6%, having joined the  FTSE 100 in the summer thanks to a decade of dividend growth.

Chief executive Andrew Jones pledged recently to be “ruthlessly efficient” in his quest to turn the company from “dividend achiever” to “dividend aristocracy”.

He added: “After all, income compounding is the eighth Wonder of the World – the secret sauce and the rocket fuel that creates wealth.”

The highest-yielding stock outside the financial sector is British American Tobacco 

, which stands at 8.1% having delivered 25 years of consecutive dividend growth. Its policy is built on distributing 65% of long-term sustainable earnings.

The yield of Imperial Brands 

 stands at 6.4% after shares rose to a five-year high in November, boosted by plans to increase shareholder returns to £2.8 billion in the 2025 financial year. This includes dividends of £1.5 billion, which will now be payable in four equal installments.

BT Group 

 has a forward yield of 5.6%, having increased the February 2025 interim award by 4%. Its full-year dividend of 5.69p a share in September was fully covered by free cash flow.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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For comparison purposes only as the Snowball only invests in Investment Trusts.

Don’t Be A Landlord. Collect 12% Annually By Owning REITs

Brett Owens

Contributor

Brett uses “second-level thinking” to find dividend stocks to buy.

Jan 1, 2025,11:00am EST

Need more dividend yield in 2025? Consider real estate investment trusts (REITs), which were literally mandated to be dividend-paying machines. Income is the point—by law.

Select REITs even yield 10% or more. What a payout! We’ll discuss seven of them—and their prospects for 2025—in a moment.

Now we can’t just blindly pick any ol’ a REIT. The real estate sector—using the Real Estate Select Sector SPDR (XLRE) as a proxy—only pays 3% right now.

But the average yield among this REIT 7-pack is 12.4%. That’s 4x what the sector pays!

That level of income would easily allow us to retire on dividends alone. But REITs aren’t all a slam dunk heading into 2025.

The Federal Reserve handed the real estate sector a boost in the form of three cuts to its benchmark rate in 2024. In fact, equity REITs have already been making the most of an improved cost of equity capital by issuing new shares to raise funds.

But the Fed also tightened up its expectations for further cuts, with the official “dot plot” signaling that the central bank expects to reduce its benchmark rate by only a half a percentage point in 2025—as early as September, they had expected a full point in rate cuts.

Let’s review this group of REITs yielding 10.4% to 15.3%, with a special focus on business and financial quality.

This REIT Mini-Portfolio Yields 12.4%

Community Healthcare Trust (CHCT, 10.4% yield) is an extremely diversified healthcare real estate owner. It boasts roughly 200 properties—including medical office buildings, urgent care centers, surgical centers, dialysis clinics, and many more types—across 35 states, leased out to 315 tenants.

And it’s the owner of one of the most curious charts I’ve ever seen:

CHCT has taken a page out of the Realty Income (O) playbook, delivering dividend increases each and every quarter for years. In fact, Community Healthcare is up to 37 quarters of uninterrupted dividend growth. But this run has been conservative and deliberate, with CHCT only raising by 0.25 cents quarterly for much of that streak.

However, the company’s funds from operations (FFO, a vital REIT earnings metric) are down below 2020 levels. A large part of the negativity in shares comes from CHCT hopping from one tenant flare-up to another. One of its tenants, GenesisCare, declared bankruptcy in 2023, resulting in a variety of outcomes for its leases, including some being assumed and assigned, and others remaining with the operating GenesisCare entity. As that was being resolved, another significant tenant began paying rent in late and/or partial amounts—though CHCT has put a consultancy team in place to resolve that issue

Shares have stabilized of late, though. The Fed’s recent rate cuts should help the company’s cost of capital, though, and most earnings models show the company rebounding after a difficult 2024. But I’d be watchful. While CHCT has rarely struggled with dividend coverage (based on its non-GAAP “funds available for distribution”), that coverage could tighten, at least in the short-term.

Global Medical REIT (GMRE, 10.8% yield) is another double-digit yielder in the healthcare real estate space. GMRE currently owns 187 off-campus medical office and post-acute, inpatient medical facilities, leased out to 275 tenants, with an occupancy rate just above 96%.

Earlier in 2024, I said that “GMRE likely bottomed out in late 2022 after one of its tenants, Pipeline Health System, entered Chapter 11 bankruptcy protection. Regardless, it has been a roller coaster to nowhere, still down by roughly a quarter of its value over the past three years after a lot of hills and valleys.” GMRE has had to deal with another bankruptcy—Steward Health Care—and has lost another 10% since then.

There are reasons for optimism. GMRE has been able to sign a 15-year triple-net lease for its large Beaumont, Texas property that was previously leased to Steward Health. The company also went on the offensive across 2024, including closing on a 15-property portfolio for $80.3 million and more recently announcing a five-property acquisition for $69.6 million that will close in 2025.

The dividend still warrants a close eye. Global Medical REIT pays out 21 cents per quarter, and is on pace to deliver 90 cents per share in adjusted funds from operation (AFFO). That’s a 93% payout ratio—rather tight unless GMRE starts growing again.

Innovative Industrial Properties (IIPR, 10.8% yield) isn’t a typical real estate investment trust. It doesn’t deal in residential properties or office buildings or warehouses. It deals in weed.

Innovative Industrial Properties provides capital for the regulated cannabis industry through a sale-leaseback program. IIPR buys freestanding industrial and retail properties (primarily marijuana growth facilities), then leases them right back, providing cannabis operators with much-needed influxes of cash that they can use to expand their operations. At the moment, it owns 108 properties representing nearly 9 million square feet across 19 states, leased out to 30 tenants.

IIPR was once the REIT industry’s growth darling, delivering nearly 900% in total returns between 2018 and its 2021 peak before cratering, losing 70% of its value since then. That includes a similarly hot-and-cold 2024, with shares up as much as 40% before cratering to 20%-losses for the year-to-date.

IIPR’s shares have fallen off in quick order across two events, one of them much more worrying than the other:

1. In November, shares dropped after the company missed revenue and normalized funds from operations (FFO). The double-digit dip was even big enough to bring out the class-action suit firms. (For what it’s worth, shares also slipped a little more a few days later after Florida’s recreational-marijuana amendment was voted down.)
2. Just a few days ago, Innovative Industrial Properties announced that PharmaCann, a tenant representing 11 properties and 17% of IIP’s total rental revenues across 2024’s first nine months, defaulted on its rent obligations for six of the 11 properties, which thanks to cross-default provisions, meant PharmaCann effectively defaulted on all of its leases.

On the one hand, IIPR now trades for less than 8 times its annualized FFO (based on 2024’s first nine months). On the other hand, this gut shot is emblematic of a marijuana industry that seemingly refuses to make money despite the actual marijuana trade exploding.

Let’s stand back and let the smoke clear.

Once upon a time, Brandywine Realty Trust (BDN, 11.1% yield) was an office-focused REIT, but it has since diversified into a hybrid REIT with a mix of properties, largely focused on greater Philadelphia and Austin, Texas. The projected net operating income of its current pipeline, for instance, is 42% office, 32% life science, and 26% residential.

Following a 2023 that saw Brandywine reduce its dividend by 21%, the REIT enjoyed a stable, uneventful and even outperforming 2024. While it’s facing some issues in Austin, its Philadelphia portfolio is thriving. Its two most exciting projects are Philadelphia’s Schuylkill Yards and Austin’s Uptown ATX, which could help drive long-term FFO growth. It also trades at a thin 6 times next year’s FFO estimates—not terribly surprising considering the recent dividend cut, though its dividend coverage has improved.

Global Net Lease (GNL, 15.3% yield) is a commercial REIT operator with 1,223 properties in 11 countries, leased out to 723 tenants in 89 industries. The U.S. accounts for roughly 80% of straight-line rents, though it also has a presence in Canada, as well as western European nations including the U.K., the Netherlands and Germany.

It’s also one of the highest-yielding equity REITs, at a whopping 15%-plus, despite what appears to be management’s best efforts to keep the dividend low. GNL has slashed its payout almost in half since 2020, across three cuts, including a 22% reduction in 2024.

Global Net Lease is currently selling off properties left and right in an attempt to bring down its leverage—it’s on pace for nearly $1 billion in dispositions in 2024, and Wall Street sees some $500 million to $600 million more in 2025. Net debt to adjusted EBITDA, at 8.4x at the start of 2024, is projected to come in at 7.8x-7.4x by the end of the year.

It’s a much healthier position, but it’s difficult to ignore the dividend track record. GNL’s high sensitivity to interest rates could also be a problem should the Fed clam up in 2025.

Double-digit yields are a relative rarity among equity REITs, but they’re commonplace among mortgage REITs (mREITs), which usually don’t own physical properties, but instead invest in “paper” real estate.

New York Mortgage Trust (NYMT, 13.7% yield), for instance, invests in a variety of mortgages and other securitized products, including residential mortgage loans, agency residential mortgage-backed securities (RMBSs), non-agency RMBSs, structured multifamily investments and more.

30-year mortgage rates have rocketed from less than 3% in mid-2021 to the high-6%s today. That has wreaked havoc on the mREIT’s residential securities. In turn, NYMT shares and the dividend have both been cleaved in half—the latter across a pair of cuts announced in 2023.

The company has almost completely unwound a multifamily joint venture that has weighed on book value, and shares trade at just 54% of adjusted book value. But the company’s undepreciated earnings (a non-GAAP financial metric NYMT uses) haven’t covered the dividend in at least three years. I’d be wary, though management seems unconcerned, saying they expect earnings will move closer to the dividend in time.

Dynex Capital (DX, 14.4% yield) is almost entirely invested in agency debt. The market’s longest-tenured mREIT is a specialist in agency MBSs—residential agency MBSs make up a whopping 97% of the portfolio, and commercial agency MBSs are another 2% or so. Non-agency CMBSs make up the remaining fraction.

Agency MBSs are considered “safer” than non-agency, but they also generally pay lower rates. As a result, agency MBS-focused REITs will utilize a lot more leverage to try to maximize performance and income. Dynex’s leverage decreased in the most recent quarter—to 7.6x, a still very robust rate.

I said in summer 2024 that“should the yield curve steepen (the gap between short- and long-term rates widen), Dynex is positioned well to benefit.” The yield curve obliged.

Morgan Stanley predicts a brighter future for “out of favour” UK property stocks in 2025 after a “lost decade”.

The broker noted the sector is “out of favour, buffeted around by top-down concerns, most recently around the UK budget and post the US elections.”

“We argue that markets are extrapolating the present; the future looks better with solid property fundamentals, falling rates, credit spreads that have normalised, capital markets that are opening and a macro calendar that should be less congested and therefore will likely dominate news flow to a lesser extent.”

“More emphasis on the bottom-up could do the trick,” the broker thinks.

Near-term Morgan Stanley sees most re-rating potential in British Land Co PLC, Derwent London PLC, Great Portland Estates PLC and Land Securities Group PLC, with a preference for British Land and Landsec as their high dividend yields means investors are ‘paid to wait’.

The broker has an ‘outperform’ rating on all four UK listed stocks.

“The UK has experienced a lost decade for real estate during which capital was deflected to other shores and confidence was low; but confidence is returning, balance sheets are healthy and assets have been marked down,” Morgan Stanley said in a note reviewing prospects for the European property sector in 2025.

More stocks should start delivering a return on equity that is closer to, or exceeds, their cost of equity, it thinks.

Morgan Stanley pointed out UK net asset values have started to turn, noting several companies reported September NAVs ahead of their March NAV.

This is an “important inflection point,” Morgan Stanley explained, noting that historically NAV growth turning positive has consistently been a “major re-rating event”.

“Real estate is a total return asset class with an income and capital growth component; when asset values (and therefore NAVs) fall, the income component is eaten up by capital value declines, which means investors make no return.”

“But when NAVs stabilise investors make the income part, and when they start rising, their return is further boosted by a non-cash capital growth element, which usually takes the return on equity closer to the equity market’s required return, triggering a major re-rating,” the broker explained.

Discount Watch

Santa works his magic in London’s investment company sector once again. That is, if the more than halving in the number of funds trading at 52-week high discounts to net assets is anything to go by. Still, we estimate nine funds hit year-high discounts over the course of the week. No prizes for guessing which funds contributed the most names – alternatives of course.

By Frank Buhagiar•30 Dec, 2024

We estimate there to be nine investment companies that saw their share prices trade at 52-week high discounts to net assets over the course of the week ended Friday 27 December 2024 – 14 less than the previous week’s 23.

Last week, we highlighted that Santa appeared to be leaving it late this year if he was going to work his magic and trigger a seasonal rally in share prices across London’s investment company space. Well, one week on and, true to form, Santa has delivered, that is if the sharp drop in the number of investment companies trading at 52-week high discounts is anything to go by. Lesson learned. Never doubt Santa!

Turns out though, Santa’s magic was not enough to give the share prices of all funds a boost, particularly those belonging to the alternatives camp. Of the nine on the list this week, seven are alternatives: one from debt, two from property and four from renewables. Alternatives have featured regularly in the Discount Watch in recent weeks on concerns that higher bond yields may lead to higher discount rates which in turn could lead to lower valuations for the underlying assets held by alternative funds. Some investors clearly not waiting around to find out.

The top five

Fund	Discount	Sector
HydrogenOne Capital Growth HGEN	-79.96%	Renewables
CEIBA Investments CBA	-74.95%	Property
VPC Specialty Lending Investments VSL	-54.47%	Debt
Ecofin US Renewables RNEW	-52.82%	Renewables
Gore Street Energy Storage GSF	-51.92%	Renewables

The full list

Fund	Discount	Sector
VPC Specialty Lending Investments VSL	-54.47%	Debt
North Atlantic Smaller Cos NAS	-34.90%	Global Smaller Companies
Urban Logistics REIT SHED	-35.09%	Property
CEIBA Investments CBA	-74.95%	Property
HydrogenOne Capital Growth HGEN	-79.96%	Renewables
Gore Street Energy Storage GSF	-51.92%	Renewables
Ecofin US Renewables RNEW	-52.82%	Renewables
US Solar Fund USF	-43.57%	Renewables
Vietnam Enterprise VEIL	-23.85%	Vietnam