One of the reasons I consider owning investment trusts is because they can help me earn passive income. At the moment, one investment trust I am eyeing for my portfolio has a yield of over 9%.
Falling share price
The investment trust in question is European Assets Trust (LSE: EAT). Over the past year, its shares have fallen 33%.
That share price fall helps explain why the dividend yield has moved up to its current level of 9.5%. But, as well as a tumbling share price, that yield also reflects the company’s sizeable dividend. Last year, its four quarterly dividends added up to 8p per share across 12 months. For a share that currently sells for around 91p, that is substantial. Not only that, but so far this year, the dividends have been 10% higher than they were last year.
So, why has the share price been falling – and can the dividend yield stay this high?
European exposure
As its name suggests, the trust owns shares in a variety of European companies. A lot of these are small and medium-sized enterprises operating in highly developed, mature markets such as Germany.
With growth prospects looking weak across Europe, investors are souring on this as an investment theme. Some economies are already in recession, while others look likely to follow soon. Even for those economies that avoid recession, growth prospects look weak. Challenges such as high inflation threaten to eat into profits for the next couple of years at least. That could hurt firms’ ability to pay dividends. In turn, that may mean European Assets Trust has less money to distribute to its own shareholders.
On top of that, the trust’s dividend policy is to try and pay a dividend equal to 6% of the net asset value per share at the end of the prior year. Falling dividends from shares it owns could hurt the trust’s income. But even if that does not happen, its falling net asset value could mean that next year’s dividend is smaller than the current one. If the present net asset value per share of around 97p remains the same at the end of this year, 6% of that would imply a dividend of about 5.8p per share next year. That would represent a fall of 34% from today’s payout.
My move on this investment trust
However, even if that dividend cut does come to pass, at today’s price the investment trust still offers a prospective yield of 6%. I think that is attractive.
It may also be that the dividend is not cut. For example, the net asset value may grow before the end of this year. Alternatively the trust’s managers may use their discretion to maintain the current dividend despite a lower net asset value.
It owns shares in promising companies, some of which I expect to do well even if the broader European economy stagnates. I think that also positions it well for growth in future. Those reasons explain why I would consider adding this investment trust to my portfolio while its shares trade for pennies.
