With inflation rising and savings rates still low, investment trusts with a history of income growth can play a useful part in a portfolio. We look at the benefits investment trusts can offer to income seeking investors and three that can help tackle inflation:
- City of London Investment Trust
- Merchants Trust
- Murray International Trust
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Joseph Hill, Senior Investment Analyst, Hargreaves Lansdown:
“Investment trusts have greater flexibility to ease some of the shocks of the stock market and to maintain a rising and sustainable income through periods of volatility.
They can hold back up to 15% of their income when times are good, effectively creating a rainy day pot known as the ‘revenue reserve’. If the dividends paid by the trust’s investments fall one year, the manager can dip into the reserve to make up any shortfall. So, the trust can top up dividends in the bad years and smooth out the dividends their investors receive over time. It’s worth noting though that frequently dipping into reserves to increase the income pay-out is unlikely to be sustainable in the long term.
Trusts aren’t limited to paying out a dividend just from the income they receive from their underlying investments. They have the flexibility to use the profits they make from buying and selling investments. However, this could erode a trust's potential for growth in the future.
Trusts can also use 'gearing'. This essentially means they can borrow money to invest in more dividend-paying shares than they could otherwise. It has the potential to boost both income and growth. The extra return may not cover the cost of gearing though, and it could also increase losses when share prices fall, so it's a higher-risk approach.
Any income paid out can help to mitigate rises in the cost of living. If the income paid isn’t required now, investors always have the option of using the proceeds to buy extra shares in the trust. Over the long term, this can be an effective way to grow capital, though there are no guarantees.”
City of London Investment Trust
“Long-serving manager (since 1991) Job Curtis invests in good quality, well-managed companies, which can be bought at reasonable share prices. He likes larger, more stable companies that often have multinational operations that are robust enough to weather economic storms and still pay dividends. Curtis also takes advantage of the trust’s ability to invest up to 20% of its assets overseas.
Curtis is part of a large and experienced team of income investors at Janus Henderson and is focused on providing long-term growth in income and capital.
In the trust’s last financial year to the end of June 2021, it used revenue reserves built up in previous years to contribute to the dividend, which rose 0.5%. This helped to extend the trust’s record as the investment company that has consistently increased its dividend for the longest period – now standing at 56 years.
At the time of writing, the trust trades on a 1.99% premium to NAV and yields 4.71%. Income is not guaranteed, and yields aren’t a reliable indicator of future income.”
Merchants Trust
“Manager Simon Gergel invests mainly in larger companies listed in the UK with the aim of providing a high level of income, and a growing income and capital return over the long term.
Gergel’s investment process focuses on three key areas. He aims to understand the fundamentals of a company, including its competitive position and financial strength. He assesses valuations compared with both the company’s own history and its peers, and finally considers industrial and consumer themes along with the economic outlook.
The trust increased its dividend by 0.4% in the year to the end of January 2022, again using reserves accumulated during the good times to boost the income paid to investors. This is the 40th consecutive year that the trust has increased the dividends its paid to investors – the 12th longest record of any investment trust.
At the time of writing, the trust trades on a 0.40% premium to NAV and yields 4.90%. Income is not guaranteed, and yields aren’t a reliable indicator of future income.”
Murray International Trust
“Abrdn’s Bruce Stout has been lead manager of the trust since 2004. Stout aims to grow income and capital over the long term by investing in company shares from around the globe, as well as holding some bonds. The trust invests more in higher risk emerging markets compared with some peers, with Asia pacific ex Japan representing the trust’s biggest regional exposure.
Stout and his team invest in high-quality, financially robust companies that have the potential to grow earnings and dividends over the long term. There’s an emphasis on resilient business models, a unique set of advantages over the competition and experienced management teams.
The trust increased its dividend by 0.9% in the year to the end of December 2021, again using reserves accumulated during the good times to boost the income paid to investors. This is the 17th consecutive year that the trust has increased the dividends its paid to investors.
At the time of writing, the trust trades on a 2% discount to NAV and yields 4.34%. Income is not guaranteed, and yields aren’t a reliable indicator of future income.”
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