New additions to Law Debenture's equity portfolio, bought during the Covid-19 market turmoil, should "increase the yield of the portfolio in two years' time", according to manager James Henderson.
Henderson told Investment Week the trust is using gearing in order to "position for a recovery in earnings and dividends".
The manager is able to look through dividend cuts due to Law Debenture's unique structure, which combines this equity investment portfolio with a professional services business, which historically accounts for 35% of the trust's dividend distribution, he added.
"We have been buying things at low levels, a lot of which do not yield at the moment but will come onto the dividend list in the next two or three years," Henderson explained.
"We are able to look through things and not be overly worried about the dividend payments from companies today because I think the best value opportunities are often the ones that are off the dividend list and [other UK equity income fund managers] have to kick out because they are not paying a dividend.
"The overall effect of this will be to increase the yield of the portfolio in two years' time, [although] we are doing this because these are cheap companies trading below book [value] that offer real opportunity."
Henderson bought shares in Marks & Spencer for the first time since he began running the trust. He said the retailer was "really using this slowdown to focus on their business and ask themselves some very hard questions about their role".
The firm said it would not distribute cash to shareholders for the year to 31 March 2021, but most sell-side analysts expect it to reinstate its dividend within two or three years.
Elsewhere, Henderson had added some of the big life companies such as Aviva, which he described as "very sound value at the moment".
Law Debenture's structure, unique in the UK equity income sector, has allowed Henderson to stray from chasing yield, with the trust's IPS business remaining robust and generating healthy cash to return to investors. Reserves of £62.5m help, too.
As a result, Henderson is able to hold some higher growth names, such as renewable energy companies Ceres Power and ITM, and have international exposure.
Ceres and ITM were two of the biggest contributors to 2020's performance, while Microsoft, which has now exited the portfolio, has contributed over a longer time period.
Law Debenture has materially outperformed Henderson and Laura Foll's other offering in the UK Equity Income sector, Lowland, in 2020, losing 13.2% compared to Lowland's 32.1%.