Interactive Investor

11 investment trusts for a £10,000 annual income in 2021

27th January 2021 11:11

Helen Pridham from interactive investor

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Despite the dividend drought, our portfolio passed the £10,000 test in 2020. Here are our 11 choices for the year ahead. 

Last year was an annus horribilis for income investors. Interest rates on savings accounts were cut to the bone and many companies reduced or cancelled their dividends. Some investors in rental properties also saw their rental incomes fall as tenants were furloughed or made redundant. 

Against this background, many investment trusts were able to provide investors with some much-needed income stability by, where necessary, accessing past income reserves – built up in good times by holding back some of their own investment income, or the fact that they can even dip into capital, to smooth out their dividends. This is not a guarantee that they will never cut their dividends, but it makes sharp fluctuations less likely.

And their skill in maintaining dividends through past periods of stock-market and economic tumult is illustrated by the fact there are currently 19 investment companies from a variety of sectors that have raised their annual dividends for more than 20 consecutive years, and another 25 that have done so for between 10 and 20 years. 

The 2020 portfolio: how it performed 

  Investment Capital value Income paid in 2020
City of London (LSE:CTY) 35,000 29,239 1,501
Diverse Income (LSE:DIVI) 25,000 25,943 969
Merchants (LSE:MRCH) 25,000 20,027 1,224
Shires Income (LSE:SHRS) 25,000 20,558 1,122
       
GLOBAL INCOME      
JPMorgan Global Growth & Income (LSE:JGGI) 25,000 27,886 941
Murray International (LSE:MYI) 25,000 22,421 1,070
Securities Trust of Scotland (LSE:STS) 15,000 14,964 456
Seneca Global Income & Growth (LSE:SIGT) 25,000 22,978 934
       
SPECIALIST TRUSTS      
BMO Commercial Property (LSE:BCPT) 15,000 10,381 648
Schroder Oriental Income (LSE:SOI) 15,000 15,203 597
tandard Life Private Equity (LSE:SLPE) 15,000 17,131 563
Total 245,000 226,731 10,025

Sources: AIC/Morningstar data as 4 January 2021 and Money Observer calculations.

Divide and rule

However, if you want to generate an income from investment trusts, it is always a good idea to spread your risk by dividing your capital among different managers, regions and asset classes. If you are wondering which trusts to choose, the Association of Investment Companies (AIC) has a useful online ‘income-finder’ tool to help you draw up a shortlist.

Showing how a portfolio of investment trusts can be used to provide a regular annual income of £10,000 is something interactive investor has been doing for the past six years. The portfolio has been reviewed every year and rebased for new investors, replacing holdings where we believe prospects may be improved. 

It is important to emphasise that there is no guarantee that the portfolio will achieve its income target and, although we expect the trusts we select to maintain or grow investors capital in the medium to long term, you must be mindful of the fact that the value of the capital may go down, especially in the short term.

Indeed, for 2020, the results were mixed. The portfolio succeeded in delivering £10,025 of income. However, the value of the capital fell by 7.5%. Over the previous six years, the portfolio has always generated £10,000 or more of income, but its capital value has fluctuated. In three of the six years the capital increased, but in the other three it declined.  

Our trust picks for 2021’s £10,000 income challenge 

This year, our proposed portfolio requires an initial investment of £237,000 (down from £245,000 last year due to a fall in share prices which has increased yields). Although it would be possible to target £10,000 of income with a lower capital sum by placing larger amounts in the highest yielding trusts, we believe it is more beneficial in the long run to take a balanced approach.

As in previous years, the core of the portfolio consists of its four UK-focused equity income trusts. City of London (LSE:CTY) takes pride of place as our largest holding. Although its performance is never likely to shoot the lights out, the manager’s conservative approach has served the trust well over the long term. Its ongoing charges are low and it has an impressive record of increasing its dividends every year for more than 50 years. It invests mainly in large UK companies, but the manager has increased its exposure to overseas companies over the past year to 15% of the portfolio.

Merchants (LSE:MRCH) also invests mainly in higher yielding UK large companies and is currently one of the highest yielding UK income trusts. It has produced year-on-year dividend growth for the past 38 years and is committed to further income growth. 

Diverse Income (LSE:DIVI) was the only one of our UK holdings that gained in value last year, and it also paid out somewhat more income than we had estimated. Over 70% of its holdings are outside the FTSE 100, including around 30% listed on AIM. It is well diversified with more than 100 holdings in its portfolio. The trust was a recent addition to interactive investor’s Super 60 list.

Dunedin Income Growth (LSE:DIG) has been brought into the portfolio to replace Shires Income (LSE:SHRS) as we believe it has better long-term potential. Dunedin Income Growth had a good year in 2019 thanks to its focus on high-quality income stocks and its exposure to Europe, which currently accounts for around 16% of its portfolio.  

Global diversity

Although optimistic that the UK stock market will do better now that a Brexit deal has been reached and the vaccine is being rolled out, holding overseas invested trusts is vital to ensure investors can access the best sources of income worldwide.

For the broadest spread, we have included four global trusts, which are the same trusts that we held last year. The best performer in capital terms was JPMorgan Global Growth & Income (LSE:JGGI). It has the advantage that its managers can invest in their best ideas, without having to worry about generating income, because its dividends, which are set at 4% of net asset value, are funded out of capital if necessary.

The other three are Murray International (LSE:MYI), Seneca Global Income & Growth (LSE:SIGT) and the Securities Trust of Scotland (LSE:STS). The latter has been retained despite a change of manager to Troy Asset Management last year. The new managers have decided to slightly reduce the trust’s dividends initially, with the aim of growing them steadily thereafter, while maintaining low volatility that will help to complement other holdings in the portfolio.

Some spice

Finally, for some added variety, our portfolio includes three specialist trusts. Standard Life Private Equity (LSE:SLPE) has been retained for a third year. Although its fortunes fluctuated last year, it eventually contributed our highest capital gain in 2020, as well as the expected amount of income. With its exposure to private equity funds across Europe as well the US, we believe it provides useful diversification.

We have also decided to retain a holding in BMO Commercial Property (LSE:BCPT). Like many other property trusts, it had a difficult 2020 and even suspended its dividends for several months. However, dividends were reinstated and we expect that with the uncertainty of Brexit over and a growing proportion of the population being vaccinated, there is considerable scope for a recovery in this sector. The new dividend amount of 0.35 pence per share equates to 70% of the dividend amount that was paid prior to its dividend being suspended in April.

Our third specialist holding is Utilico Emerging Markets (LSE:UEM). Besides offering a reasonable income, emerging markets have considerable recovery potential in 2021.

How the portfolio for 2021 looks 

  Yield (%) Investment Estimated income Dividend payable
UK EQUITY INCOME        
City of London (LSE:CTY) 5.1 35,000 1,785 Jan, Apr, Jul, Oct
Diverse Income (LSE:DIVI) 3.7 25,000 925 Feb, May, Aug, Nov
Merchants (LSE:MRCH) 6.1 22,000 1,342 Mar, June, Sep, Dec
Dunedin Income Growth (LSE:DIG) 4.4 25,000 1,100 Feb, May, Aug, Nov
         
GLOBAL INCOME        
JPMorgan Global Growth & Income (LSE:JGGI) 3.4 25,000 850 Jan, Apr, Jul, Oct
Murray International (LSE:MYI) 4.7 25,000 1,175 Jan, Apr, Jul, Oct
Securities Trust of Scotland (LSE:STS) 2.7 15,000 405 Jan, Apr, Jul, Oct
Seneca Global Income & Growth (LSE:SIGT) 4.1 25,000 1,025 Feb, May, Aug, Nov
         
SPECIALIST TRUSTS        
BMO Commercial Property (LSE:BCPT) 3.4 10,000 340 Monthly
Standard Life Private Equity (LSE:SLPE) 3.3 15,000 495 Mar, June, Sep, Dec
Utilico Emerging Markets (LSE:UEM) 3.9 15,000 585 Feb, May, Aug, Nov
Total   237,000 10,027  

Portfolio switches

Out – Shires Income
Part of Shires Income’s dividends come from its holdings of preference shares and other fixed income securities, which currently account for nearly 30% of the portfolio. We have switched to a trust with higher equity exposure which can benefit from the potential recovery in the UK market following a Brexit deal. However, for investors who like its asset mix, there is no need to switch.

In – Dunedin Income Growth
The managers of this trust aim to provide above inflation income growth with a focus on high-quality companies in the UK and further afield, currently Europe. When appropriate, the managers also use options to generate extra income. With lower ongoing charges than Shires Income, we believe it can provide better long-term growth of capital as well as income.

Out – Schroder Oriental Income
This trust has a good long-term track record. However, at the end of the year, its longstanding manager, Matthew Dobbs, announced that he was retiring in early 2021. While we believe that the new manager is likely to do an equally good job, we have decided to take this opportunity to broaden our horizons.

In – Utilico Emerging Markets
This trust is well diversified across a wide range of countries from Brazil to Romania, taking in the Middle East and Asia. It invests predominantly in infrastructure, utilities and related sectors. As the world recovers from the coronavirus, a bounce-back in the emerging markets may play out.

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. 

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.

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