Pep investors warned over high-yield trusts

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INVESTMENT trust analysts at County NatWest have warned that private investors investing in high-yielding trusts through personal equity plans are particularly at risk from declining dividend income.

Doomsday for Dividends?, County NatWest's annual review of the sector, draws attention to the dangers investment trusts will face next year because of this year's drop in the amount UK companies are paying out in dividends. County NatWest's Robin Angus is concerned that investment trusts should not try to protect their own yields by buying shares with ever-higher yields and correspondingly higher risks of a capital loss.

Mr Angus is particularly concerned about recently issued trusts with unrealistic yield targets which will not have had an opportunity to build up revenue reserves. The report says: 'Where the yield target . . . is so high as to make a declining net asset value, and hence a declining price, all but inevitable in times like these . . . these securities are not suitable investments for PEPs.'

County NatWest points out that trusts can draw on revenue reserves to sustain their dividends. They may also be able to ease any strain by charging some expenses to capital rather than income. Mr Angus said he would prefer trusts to cut dividends rather than attempt to maintain an unrealistically high yield.