Interactive Investor

11 investment trusts to earn £10,000 income in 2022

25th January 2022 10:38

Helen Pridham from interactive investor

For the seventh successive year the investment trust choices passed the £10,000 test. Helen Pridham names the trusts for the year ahead. 

Helen Pridham’s hypothetical £10,000 investment trust and fund ideas were first introduced by Money Observer several years ago. The trusts chosen are made by Helen and not interactive investor. interactive investor’s Super 60 funds and ACE 40 funds are used as a starting point. 

Last year saw a welcome recovery in company dividends as the global economy started to recover from the worst effects of the pandemic. This was good news for income investors. But not all sectors were equally fortunate. In the second half of 2021, sharp rises were seen in mining, oil and banking dividends, while travel and hospitality companies were still suffering. This is why diversification is key for investors looking for a reliable income from equities.

One of the easiest ways to achieve this diversification is through investment trusts, many of which have been set up specifically to provide their shareholders with a regular and rising income as well as to protect the value of their capital. Of course, not all trusts end up achieving these aims if the areas they invest in perform badly or their managers make the wrong choices. For this reason, it is important to spread your investment across a number of trusts run by different managers and those investing in a variety of regions and asset classes.

Why trusts have an income edge over funds

Investment trusts are a good choice for income investors because of their in-built ability to smooth out their dividend payments. This arises from the rules which allow them to hold back part of their own income in good years and build revenue reserves. These ‘rainy day’ funds can be dipped into when times get hard to maintain their own dividend payments. This proved a particularly useful tool during the pandemic. 

However, there is no guarantee that investment trust dividends will not fall, and the capital value of trusts can also fluctuate. But the fact that over 40 companies have increased their annual dividends for a decade or more, including 17 which have done so for over 20 years, riding out various ups and downs in economic activity shows their commitment to consistency.

Building a portfolio

While it might be tempting to invest in the highest yielding trusts, you would end up with portfolio of highly specialist companies, such as Venture Capital Trusts. A good way to research the options available is to use the Income Finder tool on the Association of Investment Companies (AIC) website. This enables you to create a virtual portfolio of income-paying investment companies, track the dividend dates and see how much income you could receive over a year.

Several years before this tool became available, interactive investor set out to demonstrate how a portfolio of investment trusts could be used to provide a regular annual income of £10,000. This exercise has been repeated for the past seven years. The portfolio is reviewed annually and rebased for new investors, with some holdings being replaced by others which might offer better prospects.

The portfolio is designed for medium- to long-term investors who are prepared to take the risk that it may not deliver as much income as expected and their capital may go down. It is not a recommendation and past performance is not a guide to the future. Nevertheless, so far the portfolio has managed to deliver £10,000 or more of income each year. In 2021, it produced £10,359, which was 3% more than had been expected. Its capital value has been more volatile, with decreases in three of the seven years. However, 2021 was a positive year, producing a 15% capital gain.

The 2021 portfolio - how it performed

  Investment Capital value Income paid
  Jan-21 Jan-22 in 2021
  £ £ £
UK EQUITY INCOME      
City of London (LSE:CTY) 35,000 37,070 1,802
Diverse Income (LSE:DIVI) 25,000 28,596 937
Merchants (LSE:MRCH) 22,000 27,359 1,331
Dunedin Income Growth (LSE:DIG) 25,000 27,911 1,096
       
GLOBAL INCOME      
JPMorgan Global Growth & Income (LSE:JGGI) 25,000 30,260 916
Murray International (LSE:MYI) 25,000 25,485 1,202
Securities Trust of Scotland (LSE:STS) 15,000 17,059 419
Seneca Global Income & Growth 25,000 28,652 1,012
       
SPECIALIST TRUSTS      
BMO Commercial Property (LSE:BCPT) 10,000 12,899 522
Standard Life Private Equity (LSE:SLPE) 15,000 21,929 514
Utilico Emerging Markets (LSE:UEM) 15,000 16,228 608
  237,000 273,448 10,359

Sources: AIC/Morningstar/ii data as 4 January 2022 and interactive investor own calculations.

Selections for 2022

This year, an initial investment of £257,000 is required in our portfolio to generate an estimated £10,000 income, compared with £237,000 in 2021. This is due to rising share prices over the past year, which have resulted in decreasing yields. If higher yielding trusts were used, less capital would be required, but it is more beneficial in the long run to take a balanced approach.

The foundation of the portfolio consists of four UK-focused equity income trusts that make up 45% of the total. There are good prospects for a recovery in the UK stock market this year, which has been undervalued compared to other global stock markets. 

Three of the four existing holdings have been retained. The largest is City of London (LSE:CTY), which invests mainly in blue-chip UK companies and is a ‘steady eddie’ both on the capital and income fronts. It holds an unmatched record of consistently increasing its dividends for the last 55 years. The investment in Merchants (LSE:MRCH) has been increased. This trust also invests in larger companies and has a long history of rising dividends. In 2021, it was the best-performing UK equity income trust. Diverse Income (LSE:DIVI) helps to give the portfolio more exposure to small and medium-sized businesses, currently around 35% of its portfolio is invested in AIM stocks.

Our fourth holding is JPMorgan Claverhouse (LSE:JCH), which has been brought into the portfolio this year to replace Dunedin Income Growth (LSE:DIG). Claverhouse has a good track record of delivering increasing dividends over the last 48 years. It performed well last year, and I believe its managers' pragmatic approach to investing in both value and growth stocks means the trust is well suited for any style rotations that may occur this year.

A global reach

It is important for income-seeking investors to include exposure to global companies in their portfolios because it gives access to a wider range of companies and sectors than can be found in the UK, and to countries at different stages of the economic cycle for further diversification.

In our portfolio, some 38% of the initial capital would be invested in four global equity income trusts. Each has a somewhat different global spread. Three are the same as last year. The holding in JPMorgan Global Growth & Income (LSE:JGGI) has been somewhat increased. It is the top performer in the sector over the last five years and 10 years, and was the second-best performer in 2021. Murray International (LSE:MYI) delivered on the income front, although its capital performance was somewhat disappointing. However, in my view its greater exposure to Asia than other trusts will pay off in the long term. Securities Trust of Scotland (LSE:STS) adds to the variety with its defensive approach and exposure to the UK.

This year Henderson International Income (LSE:HINT) has been added to the mix. The manager’s value-oriented approach, with a greater exposure to Europe and Asia helps to complement the other holdings and give the portfolio greater diversity. It has produced healthy income growth over the last five years.

Specialist trust picks

To give the portfolio a wider selection of assets to spread the risk further and potential for income and portfolio growth, it also includes three specialist trusts which make up 17.5% of the total investment.

Our existing three holdings have been retained. BMO Commercial Property (LSE:BCPT) provides an attractive income. Its share price started recovering last year from the pandemic and with its quality portfolio and an improving UK economy it will hopefully to pick up further.

Standard Life Private Equity (LSE:SLPE) was our best-performing holding in capital terms as well as delivering the expected amount of income. This asset class still offers much potential.

Utilico Emerging Markets (LSE:UEM) specialises in investing in emerging markets predominantly via infrastructure, utility and related sectors. These types of assets, which typically operate within established regulatory frameworks, are expected to deliver a sustainable income even during uncertain times.

Income investment trusts choices for £10,000 annual income in 2022

  Disc(-)/Prem Yield Investment Est income Dividend payable
  % % £ £  
UK EQUITY INCOME          
City of London (LSE:CTY)  -0.72 4.86 35,000 1,701 Jan, Apr, Jul, Oct
Diverse Income (LSE:DIVI) -0.60 3.32 25,000 830 Feb, May, Aug, Nov
Merchants (LSE:MRCH) -0.05 4.87 30,000 1,461 Mar, June, Sep, Dec
JPMorgan Claverhouse (LSE:JCH) 0.93 4.20 25,000 1,050 Jan, Apr, Jul, Oct
           
GLOBAL INCOME          
JPMorgan Global Growth & Income (LSE:JGGI) 0.97 3.23 30,000 969 Jan, Apr, Jul, Oct
Murray International (LSE:MYI) -7.26 4.70 25,000 1,175 Jan, Apr, Jul, Oct
Securities Trust of Scotland (LSE:STS) -0.74 2.46 16,000 394 Jan, Apr, Jul, Oct
Henderson International Income (LSE:HINT) -6.65 3.63 25,000 908 Jan, Apr, Jul, Oct
           
SPECIALIST TRUSTS          
BMO Commercial Property (LSE:BCPT) -16.17 4.05 15,000 608 Monthly
Standard Life Private Equity (LSE:SLPE) -13.16 2.36 15,000 354 Mar, June, Sep, Dec
Utilico Emerging Markets (LSE:UEM) -12.24 3.75 15,000 563 Feb, May, Aug, Nov
      256,000 10,013  

Sources: AIC/Morningstar/ii data as 4 January 2022 and interactive investor own calculations.

Portfolio switches explained

Out – Dunedin Income Growth

This trust delivered almost exactly the expected amount of income for the portfolio, although its overall performance last year was somewhat impacted by the managers cautious quality-growth bias. In 2021, it announced proposals to adopt an ‘enhanced ESG’ approach, which reducing its investible universe of UK companies by 23%.

In – JPMorgan Claverhouse

The good performance of Claverhouse during 2021, its dividend-paying record and the approach of its managers has led us to include the trust in the portfolio this year. Its flexible, ‘best ideas’ approach to value and growth stocks looks to be an advantage in current market conditions.

Out – Momentum Multi Asset Value (formerly Seneca Global Income & Growth)

This trust invests in a mixture of assets. Its portfolio is currently around 50% equities and the remainder invested in bonds and specialist assets. Momentum Multi-Asset Value Trust (LSE:MAVT) has around a 50% exposure to the UK. I have decided that a trust with more exposure to overseas equities would be better this year.

In – Henderson International Income

Henderson International Income invests in overseas stocks and has little or no exposure to the UK. Manager Ben Lofthouse takes a value-driven approach, running a focused portfolio of companies with strong cash flow and the potential to grow earnings and distributions. The trust appears well positioned for the year ahead.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.