Jasmine Birtles
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How to find the best investment trusts for income
George Sweeney
6th May 2022
With lots of investors running as far away from growth investing as possible, plenty of eyes are turning towards investing for income.
Investment trusts can be a solid way for you to prosper in this changing economic climate, with relatively little work on your part.
This guide covers all the ins and outs of finding top income-focused investment trusts. You’ll learn all about what to look for and what to avoid. I’ll also reveal some popular options that dividend-hungry investors have been gobbling up.
Click on a link below to jump to a section or keep reading for the whole, juicy dividend squeeze…
- What is an investment trust?
- The advantages
- Why use one for income?
- What makes a good income investment trust?
- Where to find the best investment trusts for income
- Popular income investment trusts
- What to watch out for
- How to invest
- What income investors need to know
What is an investment trust?
This is what’s known as a ‘closed-ended fund’. It’s different to other types of investment funds because the trust is set up as an actual company with a fixed number of shares.
So, you can think of an investment trust as a normal publicly-listed company. You can find them on major stock exchanges like the FTSE.
Each will have its own goals and methods of investing, concentrating on specific sectors, regions, or assets. Some will specifically invest for income and those are the ones you want to look for if you’re investing for an income.
To invest, you buy shares in the company. The value of those shares could then rise or fall depending on how the investments within the trust perform.
What is the advantage of an investment trust?
This particular type of investment comes with many interesting benefits:
- Because the shares are fixed, the people managing the portfolio don’t have to sell investments if shareholders want to withdraw money.
- A team of experts manage the holdings.
- It can use gearing, which means borrowing money to maximise returns (but also maximising losses in some instances, so be aware of that).
- Ability to invest in private firms that the rest of the public can’t access.
- Pooling your money with other investors means the ability to buy large illiquid assets or big stakes in companies.
- Up to 15% of any income can be set aside and then paid in future to make dividend payments more stable.
- Easy to buy and sell your shares.
- Fees can be competitive compared to actively managed funds.
Why use an investment trust for income?
The main reason is that the experts managing the trust can hunt down the best dividends from across the globe.
Dividends are a pay-out that some companies give to shareholders twice a year if they make enough profit. Not all companies do this, even if they make a profit, so it’s important that income fund managers pick those that do, of course.
So, hunting down the right companies could involve investing in sturdy British firms that you know and love. Or, it could involve more obscure investments from every corner of the world.
Huge access to regular investments and small niches gives the managers a great opportunity to secure a steady and reliable income from dividends.
It’s important to remember that dividend payments are not guaranteed. But, there are loads of investment trusts with strong records of consistent payouts – going back decades in some cases.
smoothing returns
The ability of an investment trust to set aside part of the income and pay it to you at a later date is extremely helpful.
This is something that we saw in full effect during the coronavirus pandemic, when plenty of dividend-paying stocks took big hits.
Banks in the UK were even banned from dishing out dividends!
But, investors relying on investment trusts for income fared better than most. This is because some trusts were able to maintain payments as if things were business as usual, by dipping into their reserves.
What makes a good income investment trust?
The key things you want to look out for when searching for a suitable trust that pays income are:
- Reliable and consistent track record
- Stability
- How it has performed during tough periods in the past
- The qualifications and knowledge of the people managing the portfolio
Checking all this might sound like a lot of hard work, but there are some simple shortcuts you can take.
Where can you find the best investment trusts for income?
One of the best resources you can use when looking for the best investment trusts for income is the Association of Investment Companies (AIC).
They have a ‘dividend heroes’ list that highlights particular investment trusts. Ones that have been raising dividend income for large numbers of consecutive years.
This can be a great place to start your research. Some other excellent resources to use when you’re hunting down income include:
Some of the information can seem a bit complex and in-depth. But, you can really assess the bones of an investment trust before you put them in your investment portfolio.
What are some of the most popular income investment trusts?
Here’s a few examples of options that are extremely popular with investors:
- City of London (CTY)
- Bankers Trust (BNKR)
- Scottish American (SAIN)
- F&C Investment Trust (FCIT)
- abrdn Equity Income Trust (AEI)
- Caledonia Investments (CLDN)
If you are already signed up with an investment platform like AJBell, eToro or Hargreaves Lansdown, put the names above into their search bar and you will find out more information on each one.
What should investors be wary of?
No investment is perfect. There are still plenty of areas that you should watch out for when looking for the best investments trusts for income:
- Fees: most will come with fees and although some will be reasonable, others can be quite expensive. The costs can really make a big difference to how much income you end up with.
- High yields: if the promise of income returns seems too good to be true, it probably is! Take care and look properly into any trust offering a dividend yield over 6%.
- Gearing risk: the ability to borrow money can boost gains. But, there is also the risk of the opposite happening if assets perform poorly.
- Poor management: people aren’t perfect and it’s important to remember there are people managing these big portfolios. Mistakes can happen, but it’s worth staying in the loop. Too many errors could highlight issues with how the investment trust is being run.
- Premium/discount: sometimes the share price doesn’t truly reflect the value of the assets owned by the trust. So, depending on the market, the trust could be selling at a premium or a discount.
How do you invest?
You’ll need access to a brokerage account that offers you a wide selection of investments.
Some investment trusts are huge and you can find them on the FTSE 100. But, others are much smaller and you’ll only find them on certain platforms.
Once you’ve found the income investment trust that best fits your goals, take a look to see which brokers allow you to invest.
Then, you can buy shares like you would with any other investment.
What else should income investors know?
You don’t have to buy just one income investment trust.
Sometimes, the best tactic can be to use a few different ones, making sure you have plenty of diversification.
This way, your dividends could be coming from stocks, shares, commodities, property, private equity, bonds… everywhere!
Also, if you want to keep up to date with the latest market movements, make sure you sign up to the fortnightly MoneyMagpie Investing Newsletter.
This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.
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