Double-digit yield

The share in question is the European Assets Trust (LSE: EAT).

At the current share price, its annual dividend of 8.8p per share equates to a 10.6% yield. Looking at recent years, the dividend has been increasing annually since 2018, even throughout the pandemic.

But past performance is not necessarily a guide to what comes next. No dividend is ever guaranteed — and this one may not last at its current level.

Dividend policy

That is partly because the investment trust has a dividend policy that targets paying out 6% of its net asset value at the end of the prior year. That means that if the European Assets Trust share price continues its weak performance for the rest of 2022, the dividend will likely fall sharply next year.

Its net asset value at the end of August was approximately 96.2p per share. Paying out 6% of that as a dividend would mean each share earning around 5.8p in dividends across 2023. That would be a fall of roughly 34% from the current payout. If the net asset value falls further, the cut could be worse. That said, the opposite is true. If European shares stage a recovery before the end of the year, the dividend could increase again.

However, a policy is only that: ultimately it is up to the discretion of the trust managers to decide what dividend to pay. I expect them to stick broadly to their stated policy, but they may always decide to continue the payout at its previous level if they choose. to. So the current dividend may last, although in the long term to be supportable the trust will need to earn enough from the dividends or sale proceeds it receives from its shareholdings.

Investing in Europe

However, I think the investment trust faces other challenges right now. Primary among those is a recession in some European countries. That could hurt both revenues and profits at some companies in which it has invested.

A weaker pound could also be bad news, although I see it as a double-edged sword. On one hand, it makes it more expensive for the trust to buy euro-denominated shares than before. On the other hand, the value of shares the trust already holds and dividends it receives in euros will now be higher in sterling than was the case before.

Why I’d buy this investment trust

Although there are challenges, I would buy European Assets Trust for my portfolio today if I had spare money to invest.

The yield is attractive and may still be so even after a cut. I am positive about the medium- to long-term prospects for European economies in general and think the trust would give me diversified exposure to them. As a long-term investor, I think the current share price offers me an attractive entry point.

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.