Interactive Investor

Ian Cowie: inflation-busting income from six investment trusts

25th November 2021 10:04

Ian Cowie from interactive investor

Our columnist explains how his ‘forever fund’ is preserving its real purchasing power.

Now inflation is eroding the purchasing power of money quicker than most investment companies pay out income, I am delighted to receive six dividends during the last month that deliver an inflation-busting income. Never mind the theory, here’s the practice of how one DIY investor aims to preserve the real value of my pension when I retire.

First, a quick recap on the problem: the Consumer Prices Index (CPI), the official measurement of inflation, increased by 4.2% over the year to last month, surging from a 3.1% annual rate of increase in September to hit a 10-year high. Meanwhile, statisticians Morningstar reckon the average member of the Association of Investment Companies (AIC) is yielding dividend income of 2.8%.

So, even the government’s preferred measure of inflation is running half as high again as the average investment company’s annual dividend yield. Beware the percentages involved may seem small, but their effect could compound dramatically over the decades many folk can expect to spend in retirement.

That’s enough of the doom and gloom. Here’s one man’s solution or how my globally diversified portfolio generated an inflation-busting income from six investment companies that delivered dividends within the last month.

First up, European Assets (LSE:EAT) and US Solar Fund (LSE:USF) both paid out on 29 October. This self-descriptive duo are yielding 5.7% and 5.6% respectively.

Better still, EAT has managed to increase the income it pays to shareholders by an inflation-busting average of 4.4% per annum over the last five years. There is no equivalent figure for USFP, because it was launched in April 2019. EAT shares trade 5.6% below their net asset value (NAV), while USFP is priced at a 4.6% premium to its NAV.

Next up, BlackRock Latin American (LSE:BRLA) paid out on 8 November, delivering 5.4% dividend income. Once again, there was some comfort for income-seekers keen to see evidence that a high payout has increased in the past. BRLA raised its payouts by an annual average of 5% over the last five years.

But Latin America remains the emerging market the world forgot - or maybe it just got bored of waiting for so many of its countries to grow out of teenage Marxism. Either way, BRLA shares trade at a 9% discount to their NAV.

Closer to home, JPMorgan Mid Cap (LSE:JMF) - another self-descriptive investment company in the AIC UK All Companies sector - paid out a more modest 2.2% dividend income on November 12. That’s the lowest yield among the six dividend payments I received in the last month, but it has risen by an annual average of 7% over the last five years, which is comfortably ahead of current inflation levels.

If that rate of increase is sustained - which is not guaranteed - JMF shareholders’ income would double in just over a decade. Meanwhile, with many international investors still shunning British bargains, this company continues to trade at a double-digit discount, JMF shares are priced 10.5% below their NAV.

Also on 12 November, Tufton Oceanic Assets (LSE:SHIP), an investment company that manages a fleet of 21 commercial vessels, paid its first dividend to this newish investor. There are no five-year figures yet, because SHIP was launched in December 2017, but I hope that its inflation-busting dividend yield of nearly 5.8% more than justifies this share’s modest 2.3% premium to NAV.

Finally, among my ‘super six for inflation-busting income’, JPMorgan Japan Small Cap Growith & Income (LSE:JSGI) paid out on 19 November, delivering a dividend yield of 4.2%. Following a relatively recent rejig of its distribution policy, the AIC does not provide five-year figures for this trust’s rising dividends but I remain hopeful that this portfolio of medium-sized and smaller companies can continue to deliver.

What it all boiled down to was a lowish four-figure income over the last month. If these payouts are sustained in future - which is not guaranteed - I reckon I could live on this ‘natural yield’ from my life savings if I had to.

In reality, I expect to continue dipping into the capital value of my ‘forever fund’, by selling shares from time to time, to enjoy the benefits of saving and investing while I am still young enough to do so.

Here and now, while many markets trade near record peaks, depressing yields to the point where most investment companies pay insufficient income to match inflation, it is reassuring to know my portfolio is preserving its real purchasing power - and is delivering the dividends to prove it.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor. 

Ian Cowie owns shares in BlackRock Latin American (BRLA); European Assets Trust (EAT); JPMorgan Japan Small Cap Growth & Income (JSGI); JPMorgan Mid Cap (JMF); Tufton Oceanic Assets (SHIP) and US Solar Fund (USFP) as part of a globally-diversified portfolio of investment companies and other shares.

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.