Investment Guide: Investment Trusts

Published by Rob Goodman on 05 May 2015.
Last updated on 05 May 2015


Now you need to see which funds offer you a high level of income growth while still protecting your capital.

Thanks to some of their unique features and the way they operate, investment companies are excellently placed to deliver income for shareholders – so all you need to do now is wait for your investment trust to start delivering a healthy return on your money.

Income from investment companies gets paid in the form of dividends. How often they get paid varies from company to company but the majority pays them either twice a year or quarterly. Some investment companies aim to produce a high level of immediate income or try to grow it over time, while others offer a mixture of both capital and income growth.

When you consider retirees have had a difficult time achieving a decent income in recent years – thanks to record low interest rates - it's clear why investment companies represent an attractive option for those who are willing to accept the risk that comes with any form of long-term investment.

According to recent research from the Association of Investment Companies (AIC), nearly half of active investors (46%) feel that investment companies are the most likely to deliver a consistent, high or growing income in retirement. So how do investment trusts make such a success of growing income?

Unlike open-ended unit trusts that have to distribute all their income to investors each year, investment companies are able to hold some of their income back from investors when their holdings have been performing well.

This may sound unfair but this crucial process, known as 'dividend smoothing', means investment companies are able to maintain or even increase their dividends to shareholders even during tough periods, when their holdings are underperforming and paying reduced dividends – or none at all.

On top of this, investment companies have the ability to pay dividends not just from the income they receive but also from their capital profits, too. This is used sparingly as it reduces the profit the firm makes but can be useful for companies also looking to maintain and increase dividends in difficult times.

This flexibility has helped the sector gain a reputation for delivering consistent and long-term dividend increases - even if the market isn't performing as hoped.

The AIC's latest 'Dividend Heroes' research highlights a number of trusts that have performed remarkably well for investors over half a century.

City of London, Bankers Investment and Alliance Trust, for example, have all recorded an incredible 48 years of consecutive dividend increases since they were founded, while another seven firms have delivered increases for 40 consecutive years or more.

Find the best funds and invesmtent trusts using our powerful search engine

Solid history

The AIC's communications director Annabel Brodie-Smith said: "There's nothing more reassuring to investors than a company with a solid history of dividend increases, and the investment company sector's track record here is second to none.

"Through the good times and the bad, many investment companies have been able to increase their dividend every year for decades because they have the unique ability to save some of the income they receive each year for tougher times."

Investment companies invest in a wide range of investments – giving them the best opportunity to generate higher incomes – in contrast to open- ended funds that are restricted into investing in certain types of shares and securities.

Alternative assets sectors such as commercial property, infrastructure and renewable energy can all offer higher levels of income and because they are illiquid assets, they are particularly suitable to being held in closed-ended trusts, as fund managers can take a long-term view without being pressured into sell stock to meet redemptions.

Investment companies' ability to borrow money to make additional investments via a process called gearing can also boost investors' returns if the stock performs well – though it should be noted that gearing can amplify losses, too.

With all these benefits in mind, should you still be wary of investing in these vehicles to generate an income?

In short, many of the drawbacks of putting your money in an investment company are the same as investing in general. If you need a guaranteed income or if you cannot afford to lose any of your capital, then you shouldn't consider investing in an investment company. They are not a substitute for cash deposit accounts that may not offer much in the way of income growth but do guarantee your capital.

Similarly, remember all investments are intended to be long term. You should be prepared to invest for at least five, or preferably 10 years or longer, in order to maximise your chances of seeing a healthy return on your capital.

If you are unclear about which way to go, then speak to an independent financial adviser (IFA) about your options and whether investing for now for your retirement would be a worthwhile course to take.

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