I’d love to buy this investment trust in February for its 4.37% dividend yield, but there’s one thing stopping me

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As a rule, I prefer to generate the maximum possible dividend yield by purchasing individual FTSE 100 stocks rather than investing via a fund.

I enjoy the challenge of hunting down top shares, and analysing them to see whether they can deliver both dividend income and capital growth over the long run. I’m no Warren Buffett, but I’ve done well enough.

I’m hunting for FTSE 100 income stocks

With the FTSE 100 near to its all-time high, I’m having a bit of a moment. I went on a spree in the autumn, when the index was low, and picked up Lloyds Banking Group, Persimmon, Rio Tinto, and Rolls-Royce.

While it’s early doors, all four have rebounded strongly, with Rolls-Royce cream of the crop, up 30.84% since I bought it on 1 November. For the record, its share price is still down 3.45% over 12 months and 63% over five years. Rolls-Royce doesn’t pay me a dividend at the moment, but I’m hopeful it will resume shareholder payouts this year or next.

I don’t get the same kind of excitement from buying an investment fund, as growth is averaged out across dozens of stocks. Yet I am sorely tempted by a hugely popular investment trust that operates in the UK Equity Income sector.

It is called Merchants Trust (LSE: MRCH), run by Allianz Global Investors, which manages assets totalling £837m. The trust’s objective is to provide an above-average level of income, income growth, and long-term capital growth by investing mainly in higher-yielding large UK companies.

It is best known for its proud track record of increasing its annual dividend every year for 40 years. Merchants currently offer investors an income yield of 4.37% a year.

This fund is 95% invested in UK shares. Top 10 holdings include dividend aristocrats Shell, British American Tobacco, GSK, BP, Imperial Brands, and Rio Tinto. These are all familiar names to Fool investors.

I’ll buy my own stocks, thank you

Merchants has benefited from the recent FTSE 100 rebound, and has climbed 13% over three months. Over one year, it is up 8.8% and a somewhat more impressive 58% over five years. As with any stock market investment, past performance is no guarantee of future returns, and those dividends are not guaranteed.

The trust has a low ongoing charges figure (OCF) of just 0.59%. It currently trades at a slight premium to net asset value, of just 0.9%. That’s not unusual for Merchants, which is a premium fund. Investor demand is as strong and steady as its performance.

Naturally, it could fall in value if the FTSE 100 dips, so now may not be the best time to buy it, given the recent strong run. Yet it looks like a great long-term buy and hold, so what’s stopping me from buying it?

It’s a personal thing. I like rummaging around for individual stocks to build my own portfolio. After my recent successes, I’m going to stick with my direct equity strategy. Investors who want a fund manager to do the job for them, might take a different view. Here at the Fool, we believe individual investors are best placed to take care of their own financial future.

The post I’d love to buy this investment trust in February for its 4.37% dividend yield, but there’s one thing stopping me appeared first on The Motley Fool UK.

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Harvey Jones holds shares in Lloyds Banking Group, Persimmon, Rio Tinto and Rolls-Royce. The Motley Fool UK has recommended British American Tobacco, GSK, Imperial Brands and Lloyds Banking Group. 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.

Motley Fool UK 2023