Market shake-outs are often a great time to buy high quality investments with long track records of wealth creation. With investors torn over the prospects of the major UK stock markets we believe Merchants Trust (MRCH) is just such an opportunity.

With roots that go back to 1889 there is no type of market the trust has not navigated, embracing both booms and busts without ever swerving from its value-oriented knitting. Merchants mainly looks for reliably high-yielding large cap stocks that are capable of paying above market dividend yields, year after year.

Running a fairly concentrated portfolio of between 40 and 60 stocks, typical examples include cash generative industries like tobacco, oil and financial services, where the trust has recently been upping stakes in names like Imperial Brands (IMB), Royal Dutch Shell (RDSB) and Barclays (BARC). But Merchants will also happily scour mid caps for opportunity, such as new stakes in soaps maker PZ Cussons (PZC) and spirits supplier Stock Spirit (STCK).

These holdings provide the cash flow to pay Merchants’ shareholders a dividend yielding 5.5%, a rare prize given the level of security built in.

This should be of enormous comfort to income-starved investors today faced with significant uncertainties, both at home and abroad, plus dismal returns from both savings accounts and bonds.

Merchants is one of just 20 investment trust ‘dividend heroes’, which means it has increased shareholder payouts every year for at least the last two decades. Merchants’ own track record is 37 years, and counting.

OUT OF FASHION

This sort of firm focus on value and income is not always fashionable and, being totally honest, the trust’s near-term performance has been patchy. In the half year to 31 July the trust generated a total return (share price growth and dividends combined) of 7.6%, decent but less than the 10.6% of its benchmark FTSE All-Share.

Merchants’ manager Simon Gergel, part of the Allianz Global Investors team, puts this temporary underperformance down to what he sees as a ‘polarisation’ of the UK market that has become even more extreme this year.

Macro events like the US-China trade tiff and, of course, Brexit have encouraged investors to chase perceived high-quality companies at any cost, or inexpensive tracker options like ETFs.

Merchants’ above average yield, and inexpensive 0.27% ongoing charge, offers significant security and downside protection for investors if value remains relatively out of favour for longer.

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