Best trusts to boost your income

5 April 2017
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Income has become increasingly hard to find over the past few years. Since the Bank of England cut its base rate to a record low of 0.25% in August 2016, investors have found it virtually impossible to earn interest from savings accounts and have been forced to search elsewhere.

Virtually anyone can need an income injection. In some cases, it will be families looking to make their savings work harder to help pay the monthly bills, while in others it will be retirees that want to supplement their pensions.

One potential solution is investment trusts that deliver an income in the form of dividends. Some will pay out twice a year; others will do so on a quarterly basis. Their approaches may be different, but the fact is they are worth considering.

According to Annabel Brodie- Smith, communications director at the Association of Investment Companies (AIC), there are many reasons why investment trusts, also known as investment companies, could potentially meet the needs of incomeseeking individuals.

“Investment companies have a number of income advantages, including the unique ability to hold back some of the income they receive to boost their dividends in tougher times,” she explains.

It's a good point. Trusts can hold back up to 15% of the dividends generated by the underlying portfolio in order to supplement future payments. This means investors won’t experience a rollercoaster ride of dividend payouts.

In addition, their closed-ended structure makes them particularly suitable for higher-yielding assets, such as commercial property and infrastructure that are ‘illiquid’ meaning they are diffi cult to buy and sell quickly.

 

As the search for income intensifies, such products will come on the radar. Investors seem to acknowledge the role investment trusts may be able to play within income provision, according to analysis of the 20 most viewed investment companies on the AIC website last year. It reveals that more than half have a dividend yield of at least 3%, while 11 companies have increased dividends for 10 years or more.

“Investors are still on the hunt for income, with the rankings demonstrating demand for income-focused companies,” explains Ms Brodie-Smith. “It’s not surprising some investors want to consider investment companies for their individual savings accounts (Isas), pensions or long-term savings.”

Plenty of investment trusts have increased their dividends for at least 20 consecutive years – and two have done so for half a century. When you consider the variety of market conditions over that time, this is a truly remarkable achievement.

The ability to smooth dividend payments is one of the key reasons why Gavin Haynes, managing director at wealth manager Whitechurch Securities, considers using investment trusts for his income-seeking clients. “I like trusts for equity income purposes,” he says. “Many of them have built up long-term consistent track records of increasing dividend distributions.”

Investment trusts are certainly worth considering by income-seekers, but they don’t come with any guarantees. As with any investment, your money is exposed to a degree of risk, so it’s important not to invest anything you can’t afford to lose.

In particular, you shouldn’t put your money in investment companies if you need a guaranteed income. However, if you are comfortable with the risks, then investment companies may be beneficial as part of a longer-term income stream.

 

Income trust recommendations

One trust that Mr Haynes favours is Henderson High Income, pointing out it is a solid, income-focused investment trust with a benchmark to invest 80% in UK dividend stocks and 20% in bonds, although it will be flexible in this respect.

“For investors where income is a key objective, I would recommend this trust as it offers an attractive yield above 5% and has a reasonable charging structure with an annual charge of just 0.5%,” he says.

He also likes Edinburgh Investment Trust, managed by Mark Barnett. “It’s a good core choice for UK equity income and uses gearing to potentially enhance returns,” he explains. “Standard Life Investments Property Income has also proven to be a good choice for UK commercial property exposure and offers an attractive yield of 5.5%.”

Not everyone is so positive on their use though. Patrick Connolly, a certified financial planner with Chase de Vere, suggests the structure of investment trusts makes them typically higher risk than open-ended funds, which might not be ideal for income investors.

However, there are some that might be suitable. “As income investors tend to be quite cautious, we would use broadbased UK or global equity investment trusts to provide income,” he adds. “We’d recommend Perpetual Income & Growth Investment Trust, Lowland Investment Company and Henderson International Investment Trust.”

Investors need to be careful when they’re choosing a trust, according to Justin Modray, founder of Candid Financial Advice. “They must beware of investment trusts that have higher than usual incomes as there might be added risks or strings attached,” he says.

For more adventurous investors he suggests Utilico Emerging Markets. “This invests in infrastructure companies and provides a good income with decent prospects for long term growth, albeit with volatility along the way,” he adds.

Dennis Hall, founder of Yellowtail Financial Planning, agrees it pays to be cautious. He points out that a decision on which trust is most suitable for a client’s needs will largely depend on how much income needs to be generated.

“I’m uncomfortable using trusts that are solely going for maximum income through exposure to higher-risk assets,” he explains. “I prefer to use tried and tested income trusts such as City of London.*”

In addition, he doesn’t believe income investing can be achieved over shorter-term investment horizons. “It is a long-term hold, with no attention paid to capital values, which will fluctuate, and sometimes be depressed for several years,” he adds.

Martin Bamford, managing director of Informed Choice, suggests the Murray International Trust* for income seekers. “It’s trading at a slight discount of -1.71%, offers a nearly 4% dividend yield, and is well diversified across global equity markets, with income and value oriented themes,” he explains. “The manager seeks to achieve an above-average dividend yield.”

Where to get frequent income

Research from the Association of Investment Companies suggests almost half (46%) of investment companies that pay a dividend are now doing so on a quarterly basis.

That equates to 104 companies paying dividends quarterly, in comparison to 92 companies (43%) a year ago.

In 2010, only 17% of investment companies paid a quarterly dividend. Elsewhere, the number of companies paying a bi-annual dividend has decreased from 30% in 2016 to 28% in 2017, while just under a quarter (23%) of companies continue to pay an annual dividend; the same as in 2016.

Five investment companies – Ediston Property, F&C Commercial Property*, Fair Oaks Income, SME Loan and TwentyFour Select Monthly Income – each pay dividends on a monthly basis.

Dividend Heroes

These are the investment trusts that have delivered year after year – irrespective of the economic or market backdrop.

These so-called dividend heroes have produced consecutive increases in their dividends for decades – some for almost half a century. The most recently published data reveals that 20 trusts have improved their dividend payments every year for at least two decades.

 

The most consistent

City of London* and Bankers have notched up an incredible half a century of dividend increases. That’s every year since the mid-1960s!

In addition, there are 17 trusts – dubbed ‘the next generation’ – that have recorded at least 10 years of increases.

Many have achieved this remarkable goal thanks to their ability to smooth returns, says Annabel Brodie-Smith, communications director at the Association of Investment Companies.

This sees them squirrelling away some of the income gains they achieve in the best years in order to supplement bad periods. “It’s reassuring for investors that some investment companies have an unrivalled record of dividend increases,” she says.

City of London Investment Trust*

The company’s objective is to provide long-term growth in income and capital, principally by investment in UK equities.

Its manager, Job Curtis, has been at the helm since July 1991 and prefers to run the portfolio in a conservative way. This means he focuses on companies with cash-generative businesses that are able to grow their dividends with attractive yields. 

His portfolio is also well diversified with around 66% in blue-chip UKlisted stocks and is heavily exposed to the United Kingdom. The 10 largest holdings include Royal Dutch Shell, British American Tobacco, HSBC, Diageo, and Vodafone Group, according to the most recent fact sheet.

The Bankers Investment Trust

This trust aims to maximise shareholders’ total return by means of a broadly diversifi ed international portfolio. Launched back in 1888, it has been managed since 2003 by Alex Crooke.

It aims to achieve long-term asset growth in excess of the FTSE All-Share Index and regular dividend growth in excess of the Retail Prices Index (RPI) rate of inflation.

The investment strategy involves buying shares of predominantly international companies listed across the world. Its most prominent holdings include BP, British American Tobacco, Apple, Royal Dutch Shell, and Amazon, according to the latest fact sheet. Its geographical focus, meanwhile, sees the highest exposure of 29.5% to the United Kingdom, followed by North America (28.2%) and Europe (14%).

*Denotes member of the Moneywise First 50 Funds.

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