This UK-focused equity income trust packs a punch. The trust contains all the heavy-hitting cyclical FTSE 100 dividend income payers you’d expect from a portfolio that outstrips the benchmark in terms of yield.
With a 7.15% yield, the abrdn Equity Income Trust should be considered by those seeking a substantial dividend while willing to accept the risk and benefits associated with high-beta equities.
The high yield is achieved through a portfolio of predominately UK stocks. The portfolio has an 82% weighting towards UK equities. abrdn identifies 57% of the portfolio as cyclical and remaining sensitive or defensive.
Financial services account for 35% of the portfolio, and the trust enjoys steadily increasing dividends from FTSE 100 banks NatWest and Barclays, both of whom have also announced share buybacks. The Natwest holding was added increased recently.
The trust is harnessing the higher energy price environment with top holdings, including Shell, BP and SSE. Managers recently took the opportunity to take profits in BP while increasing their holdings in Diversified Energy via a placing.
Ithica Energy’s strong cash generation is seen as an opportunity by the trust – managers see the potential for attractive dividends from the company.
In their half-year report issued 26th May, abrdn managers reflected on a note of caution in UK equities. Still, they were confident in the income generation capabilities of the portfolio and were positive on current valuations:
“The fluctuating macro landscape has created some sharp swings in performance within the UK equity market during the period. Although markets went up during the six months, there was an underlying tone of caution, as reflected in the continued out-performance of large cap stocks. This was largely driven by the ever-present fear that recession could be imminent. Many commentators pointed to the inversion in the yield curve (where long- dated bond yields fall below short-dated bond yields) as a forward-looking indicator that recession is likely at some point in the next two years.
“Against this uncertain backdrop, our approach remains to stay focused on companies that have the ability to generate strong cash flows and pay these cash flows out in the form of dividends. We believe that many companies with these characteristics have been overlooked by the wider market in recent years, resulting in valuation opportunities.”
The trust is clearly well thought of by the market with a 0.3% premium compared to a UK equity income investment trust sector dominated by trusts trading at deep discounts.
The trust’s share price has returned a 13.72% annualised return over the past three years.
