I have been thinking about adding more investment trust shares to my portfolio. One of the attractions for me of buying investment trusts right now is that I think some of them look like good value. I have been eyeing one that now offers an annual dividend yield of 9%. So — should I buy it?
European Assets Trust
The name in question is the European Assets Trust (LSE: EAT). The trust focusses on medium-sized companies in Continental Europe. With soaring energy prices, high inflation, and tightening consumer spending, the sales outlook for some such businesses is starting to look bleak.
That helps explain why the investment trust’s share price has fallen 40% over the past year.
But are things really that bad? Are the companies in which the trust owns stakes really worth only three-fifths of their value at this point last year? I think that the fundamental long-term business prospects of many such firms remains good. For example, consider a couple of the trust’s 10 largest holdings: Danish bank Ringkjoebing Landbobank and Dutch foodservice firm Sligro. In the long term, I expect customer demand in both sectors to remain high.
But the trust’s shares have fallen a long way. As of 29 July they were trading at a discount of 6.8% to the net asset value of the trust’s portfolio.
Juicy dividend
Not only do I feel the current share price does not reflect the long-term potential of the trust’s portfolio, I am also attracted by the dividend.
European Assets Trust pays out quarterly. At the moment, the annual dividend yield is 9.2%, which I regard as highly attractive.
Is that yield sustainable? One question is whether the firms in which the trust invests will continue to pay dividends at their current level. That is never guaranteed and it affects the trust’s own ability to pay out funds to shareholders.
But even if it has enough money, the trust may still cut its dividend. The stated aim is to set the dividend at 6% of the net asset value at the end of the prior year. We have seen a tumbling net asset value so far this year. If it does not recover by the end of the year, I think there is a fair chance the trust’s dividend will be reduced next year.
Still, a yield of over 9% means that even after a dividend cut, the income potential of the shares could be substantial.
Should I buy this investment trust?
I think this investment trust offers me exposure to the sorts of European companies I expect to perform well in the long term, although they face headwinds in the short term like inflation hurting customer demand.
The dividend may not continue at its current level. But I think the income prospects for the European Assets Trust continue to look promising. That is thanks to its ownership of a diversified range of shares in profitable companies. I would consider opening a position in this investment trust in my portfolio today.