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I have been keeping an eye a number of shares over the past few months as potential additions to my portfolio. One of those is European Assets Trust (LSE: EAT). The investment trust offers me exposure to a diversified portfolio of European businesses.

It has just slashed its dividend. So should I steer clear — or invest?

That dividend cut

In principle, the trust managers can set the dividend using their own discretion. In practice, however, they have set out 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 31 December each year.

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

The net asset value fell sharply last year. The trust has announced that its proposed total dividend this year will therefore be 5.8p per share, again paid in four equal instalments. That is a fall of 34% compared to last year’s dividend.

What a falling yield means

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

But for an investment trust, I see things a bit differently. The net asset value of European Assets Trust fell last year. But that does not necessarily mean that the underlying businesses are less attractive than before. It means that the value of the trust’s share portfolio has gone down, which is a different thing.

If the net asset value rises this year, which is a possibility, I expect the dividend to increase next year in line with the trust’s policy. Meanwhile, the trust’s share price has fallen by 29% over the past year.

So while the dividend has fallen a bit faster, the share price fall means the yield I could get through buying today is not much smaller than it would have been if I bought a year ago. The current yield is 6.1%, which I regard as attractive.

Risks and reward

European businesses face ongoing risks, such as high energy costs hurting profits. That could mean that the shares owned by the investment trust have another tough year, leading to a further dividend cut next year.

But I still see potential value for my portfolio here. This investment trust offers me exposure to dozens of European firms, which may benefit when the economy starts to strengthen again. I can hopefully get a 6% dividend yield. That may rise again in future, which in turn could help support a higher share price. If I had spare cash to invest today, I would buy European Assets Trust shares for my portfolio.

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