This investment trust dividend yield just crashed. Time to buy?

I’ve been keeping an eye on a number of stocks over the past few months as potential additions to my portfolio. One of them is European Assets Trust (LSE: eat). The investment trust gives me exposure to a diverse portfolio of European businesses.

It has just slashed its dividend. So should I get rid of it – or invest?

Cut that dividend

In principle, the trust manager can adjust the dividend using his own discretion. However, in practice, they create a dividend policy to guide their actions. The next dividend payment on shares on December 31, 2019 was changed to +6.27%.

In 2021, the investment trust ended the year with a net asset value per share of £1.46. So 6% that would be 8.76p. That explains why last year’s dividend was 8.8p per share, paid in four equal instalments.

Net asset value fell sharply last year. The trust has announced that its total proposed dividend this year will be 5.8p per share, payable in four equal instalments. It is down 34% compared to last year.

What does the fall result mean?

For many companies, I would take a falling dividend yield as a sign of worse business prospects.

But for investment trusts, I see things differently. The net asset value of the European Assets Trust decreased last year. But that doesn’t mean the underlying business is any less attractive than before. It means that the value of the trust’s stock portfolio has gone down, which is different.

If the net asset value increases this year, perhaps, I expect the dividend to increase next year in line with the trust’s policy. Meanwhile, the Trust’s share price has fallen 29% over the past year.

So while the dividend has fallen faster, the falling share price means that the yield I can buy today is not much smaller than if I bought it a year ago. The current yield is 6.1%, which I think is attractive.

Risk and reward

European businesses face ongoing risks, such as high energy costs eroding profits. This could mean that stocks owned by investment trusts have another tough year, leading to further dividend cuts next year.

But I still see potential value for my portfolio here. This investment trust gives me exposure to dozens of European companies, which can benefit when the economy starts to strengthen again. I hope to get a 6% dividend yield. That could rise again in the future, which could help support higher stock prices. If I had money to invest today, I would buy European Assets Trust shares for my portfolio.