BlackRock North American Income Trust (BRNA) offers a high level of income (currently yielding 5% on a historic basis) from a diversified portfolio of primarily large cap US equities and an extensive option-writing programme.
The trust is run by Tony DeSpirito (lead manager), Franco Tapia and David Zhao, who utilise deep fundamental research to create a portfolio of high quality, U.S. dividend-paying companies. Disciplined application of value investment principles and dividend growth are areas of focus for the managers, as they believe these elements are key to achieving long-term returns with low levels of volatility.
Income has become a particular focus for the managers following a shift of strategy in 2018 which increased the pay-out by 62% and allowed a proportion to be funded from capital. This dividend level was maintained in 2019 and at the current share price, the trust offers investors a yield of 5.0%. As well as the income from the portfolio and the use of capital reserves, the team makes extensive use of option writing to generate premiums and boost income. Currently the BlackRock team has written options to the value of 15.1% of the portfolio.
The trust has an impressive track record for total returns, typically protecting capital well in falling markets and keeping up with the benchmark and peers in rising markets. As we discuss in the Performance section, since the current managers took over in 2014, the trust outperformed peers and benchmark significantly. Currently BRNA trades at a discount of 6.4%.
Currently yielding 5%, BRNA is an attractive option for income reliant investors. Janus Henderson recently released a report looking at the reliability of dividends across geographies and identified the US as a relatively safe market. This was largely due to their strong policy stimulus in response to the pandemic, and the fact there have been no regulatory demands made on companies not to pay dividends. In addition, almost all companies pay dividends quarterly, spreading the risk of cancellations, and pay-out ratios are relatively low (buybacks are popular in the US). All this means that dividends are likely to be more resilient in comparison to UK and European companies. More specifically to the trust, BRNA also now has the capacity to pay dividends from capital. In 2019 for example, 62.5% of the full year dividend came from portfolio income, the remainder from capital and reserves.
Alongside the attractive yield, the managers have also shown a clear capacity to capture upside and limit downside. This has been illustrated over the past three years, where the trust has lost considerably less than the Russell 1000 Value benchmark in the falling markets of 2018 and 2020, whilst keeping up with the benchmark and peer group in the rising market of 2019. As such, we see the discount of 6.4% as an attractive entry point into a trust that regularly trades at a premium.
|Strong track record of delivering total returns||Value orientated approach continues to be out of favour|
|An attractive yield and arguably more resilient dividends than other sectors||Narrow discount relative to peers|
|Low levels of volatility are attractive in the current environment||Uncertainty continues to surround the US domestically and with overseas trade|