2 dirt-cheap dividend investment trusts yielding more than inflation

These two investment trusts have high real yields.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Even though inflation dropped back to 2.6% last month, its overall trajectory seems to be an upward one. The impact of Brexit is still being felt via a weak pound, with sterling depreciating recently versus the euro. This is causing inflation to increase and, with Brexit talks apparently stalling, the outlook for the pound seems to be relatively downbeat.

As such, buying investment trusts which offer a high dividend yield could be a shrewd move. Here are two trusts that could beat inflation – even if it continues to move higher over the medium term.

Growth potential

The two investment trusts in question are Dunedin Income Growth (LSE: DIG) and the Murray Income Trust (LSE: MUT). They have dividend yields of 4.5% and 4.1% respectively. This means they are at least 150 basis points ahead of inflation at the present time. Even if the rate of growth of prices increases above 3%, they are very likely to deliver a real income return for their investors.

Should you invest £1,000 in Games Workshop right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Games Workshop made the list?

See the 6 stocks

In addition, they both trade at a discount to their net asset values (NAVs). Dunedin Income Growth has a discount of 9%, while the Murray Income trust’s discount is around 7%. These figures suggest they may offer good value for money, with their share price growth of 9% and 6% respectively during the last six months showing they are able to perform relatively well versus their benchmarks.

Income outlook

Both trusts could help investors to counter the threat of inflation, not only through their current dividend yields, but also because of the companies they are invested in. While they generally hold UK-listed shares, the companies they own shares in have significant international operations. This may enable them to benefit from higher growth rates outside of the UK economy, as well as a weaker pound.

If sterling depreciates further then it would be unsurprising for both trusts to deliver improved share price performance. Dividends and share price valuations within the fund could gain a boost from currency fluctuations and this may lead to improved total returns for investors. And with international diversity comes a lower risk profile. This may help investors to overcome the potential risks from Brexit over the medium term.

Possible risks

Looking ahead, investment trusts focused on income could see their valuations come under pressure from a rising interest rate. If inflation continues to be relatively high then the Bank of England may seek to tighten monetary policy to some degree in order to cool-off rising prices. In such a scenario, other asset classes such as bonds may become relatively more attractive for income investors.

However, with the UK economy continuing to face an uncertain outlook, the prospect of a sustained interest rate rise seems unlikely. With diverse holdings, discounts to their NAVs and above-inflation income yields, Dunedin Income Growth and the Murray Income Trust seem to be worthwhile buys for the long term.

But there may be an even bigger investment opportunity that’s caught my eye:

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Older couple walking in park
Investing Articles

Could £300 a month invested in US and UK shares reach a million by retirement?

Could an investor retire with a million pounds just by dedicating £300 a month to US and UK shares? Mark…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Is £800 enough to start an ISA?

Is it worth bothering with an ISA with less than £1,000 to spare? This writer believes it may be --…

Read more »

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »