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I have been eyeing various stocks over the past few months as potential additions to my portfolio. one of those is European Asset Trust (LSE: EAT). The mutual fund gives me exposure to a diversified portfolio of European companies.
You just cut your dividend. So should I stay away or invest?
That dividend cut
In principle, the trustees can set the dividend at their discretion. In practice, however, they have established a dividend policy to guide their actions. The annual dividend is set at a level equivalent to 6% of the net asset value as of December 31 of each year.
In 2021, the investment fund ended the year with a net asset value per share of £1.46. So 6% of that would be 8.76p. That explains why last year’s dividend was 8.8 pence per share, paid in four equal installments.
The net asset value fell considerably last year. The trust has announced that its total proposed dividend for this year will therefore be 5.8 pence per share, again paid in four equal installments. That’s a 34% drop compared to last year’s dividend.
What does diminishing returns mean?
For many companies, I would take a drop in the dividend yield as a sign of worsening business prospects.
But for an investment trust, I see things a little differently. The net asset value of European Assets Trust fell last year. But that doesn’t necessarily mean the underlying businesses are any less attractive than before. It means that the value of the trust’s stock portfolio has gone down, which is something else.
If the net asset value increases this year, which is a possibility, I expect the dividend to increase next year in accordance with trust policy. Meanwhile, the trust’s share price has fallen 29% over the past year.
So while the dividend has fallen a bit faster, the falling stock price means that the return you could get buying today isn’t much less than it would have been if you had bought a year ago. The current yield is 6.1%, which I find attractive.
risks and reward
European companies face constant risks, such as high energy costs that hurt profits. That could mean shares owned by the investment trust will have another rough year, leading to another dividend cut next year.
But I still see potential value for my portfolio here. This investment fund gives me exposure to dozens of European companies, which stand to benefit when the economy starts to strengthen again. I hope I can get a 6% dividend yield. That may rise again in the future, which in turn could help support a higher share price. If I had extra money to invest today, I would buy European Assets Trust shares for my portfolio.
