Nine investment trusts to generate a £10,000 income in 2026

A year ago, I selected nine investment trusts with the aim of achieving £10,000 of annual income in 2025.

Collectively, the hypothetical portfolio yielded 5.26%, meaning that a sum of £190,000 was required to attempt to hit the target.

• Invest with ii: Invest in Investment Trusts | Top UK Shares| Interactive investor Offers

However, the portfolio was hit by a curveball as Henderson International Income announced on 7 February 2025 – just days after the £10,000 investment trust article was published – proposals to merge with JPMorgan Global Growth & Income (LSE:JGGI), also part of the portfolio.

The merger took place towards the end of May, and the fund managers and investment objective of JPMorgan Global Growth & Income will remain the same.

For our 2025 hypothetical portfolio, the merger hit the income returns, leading to a near-£1,000 shortfall of our target. Just a third of the income expected from Henderson International Income was procured.  

However, the good news is that the overall total returns for the portfolio came in at 13.1%, turning £190,000 into £214,828. As a result, the shortfall could have been paid out of some of the capital gains, which stood at £15,641 versus £9,186 for income (with a total return of £24,827).

As ever, bear in mind that these portfolios are hypothetical and educational. The portfolios are designed to provide food for thought and demonstrate the challenges DIY investors face when building an income-producing portfolio. For more information, please see the section on ‘purpose of the portfolio’ in the final section of this feature.

I’ve been assembling the portfolios for four years and below is how they have fared each year. While there’s no benchmark to ‘mark my homework’, I’ve listed the return of the Investment Association’s (IA) 40-85% Mixed Investment Sector, which in common with this hypothetical portfolio contains funds holding both shares and bonds.

• 10 funds to produce a £10,000 income in 2026
• Retirement case study: how I manage a £2.5m SIPP and ISA portfolio

Source: FE Analytics. Past performance is not a guide to future performance.

How the 2025 trusts performed

The biggest contributor to performance was City of London (LSE:CTY). The Janus Henderson-managed trust delivered a share price total return of 28.1%, with its preference for FTSE 100 dividend stalwarts having a stellar year.

Diverse Income Trust (LSE:DIVI) took second place among the UK picks, with a return of 23%. Managed by Premier Miton, it invests across the UK market in both large and smaller companies but tends to have a bias towards the latter.

The other two UK equity income trusts underperformed the sector average return of 20.8%. Dunedin Income Growth (LSE:DIG), which has moved to an enhanced dividend policy, wasn’t too far off, with gains of 18.6%, but Merchants Trust (LSE:MRCH) was further afield, with gains of 14%.

The best overall returns, although having less influence due to a lower percentage weighting in the portfolio, was Utilico Emerging Markets (LSE:UEM), up 31.3%. It benefited from the tailwind of emerging markets outperforming developed markets for the first time in many years in 2025, with US dollar weakness a key driver, as many developing economies have significant dollar-denominated debts.

Bond fund TwentyFour Income (LSE:TFIF) delivered handsomely, giving the portfolio nearly £2,000 of income from £19,000. Its overall total returns were 16%.

JPMorgan Global Growth & Income, the portfolio’s largest holding, returned just 2.9%. It has big exposure to the US (at 70%), as well as owning six of the Magnificent Seven tech giants in its top 10 holdings, bar Tesla.

A pivot away from US companies by investors and growing concerns about the amount of money being invested in artificial intelligence (AI) advancements were both headwinds that played a part in blunting returns over the period. On a positive note, over three and five years, the trust is ahead of the sector average, up 80.9% versus 71.3% over the latter period.  

However, the same cannot be said for Greencoat UK Wind (LSE:UKW), which is also in the red over three and five years, down -24% and -3.4%, and recorded a loss of -15.7% during 2025. It generated a good level of income, and has a high yield, but this has come at a cost of sizeable negative overall total returns.

Source: Morningstar. Total return figures are one year to 31 December 2025. 12-month yield as at 31 December 2025, used to estimate income from initial value. Past performance is not a guide to future performance.

*Henderson International Income had a yield of 4.5% at the end of April 2025 prior to its merger with JPMorgan Global Growth & Income. As a result we have reduced the yield by a third to reflect the estimated income generated. 

How the 2026 line-up has changed

For an investor building an income portfolio today, it is more challenging than a year ago as yields for UK equity-focused investment trusts are lower. For example, a year ago City of London and Merchants Trust had yields of 4.9% and 5.3% respectively, but they are now yielding 3.8% and 4.6%.

Rising share prices for the largest companies in the FTSE 100 index, which both trusts have plenty of exposure to, have pushed down yields.

Moreover, a decision to remove a high-yielding trust that was in the portfolio last year has lowered the overall yield to 5% for the 2026 line-up. To generate £10,000 of income requires a portfolio size of £200,000. 

All yield figures were sourced in late January, but bear in mind that yield figures are not static. 

• Tips and tricks on how to generate a sustainable monthly income
• Investment outlook: expert opinion, analysis and ideas

Two trusts exit the 2026 portfolio

As each investment trust is chosen for the medium to long term, I’m inclined to avoid making many changes each year. However, there are certain things I consider, including a fund manager change, short- and long-term performance, and whether I can simplify the portfolio.

With investment trusts other things to think about are whether it is trading on an excessive premium, which occurs when its share price trades above the value of its underlying investments, known as the net asset value or NAV.

For investment trusts on wide discounts (when the trust’s share price trades below its NAV per share), it’s also worth considering whether there’s some sort of commitment to rein in a discount through share buybacks.

Also size up the strength of the revenue reserves (see below for an explanation of ‘income edge’). 

There was one fund manager change among the 2025 investment trust selection. In February last year, it was announced that Stephen Lilley, the longstanding fund manager of Greencoat UK Wind, would be stepping down in April.

As a result, the two managers who had been managing the renewable infrastructure trust since launch in 2013 are no longer in charge. Laurence Fumagalli, who had been co-manager alongside Lilley, stepped down around a year before the latter announced he would be leaving.

Matt Ridley has been managing the trust since March 2024, while Steve Packwood joined in January 2025. Both work for Schroders Greencoat, the investment manager of Greencoat UK Wind.

While the investment process remains the same, the trust’s long-term record of increasing its dividend each year in line with RPI inflation since launch in 2013 hasn’t been maintained by the managers now at the helm. However, there have been multiple headwinds outside the control of the current fund managers.

Higher interests hit renewable energy infrastructure trusts, causing yields to rise on the safest types of bonds, such as UK and US government bonds. In turn, investors were less incentivised to take greater levels of risk, which led to lower demand for the sector.

Due to this, as well as uncertainty over when a recovery will play out for the sector, I have removed it from the 2016 line-up.

The hope is that falling interest rates will act as a catalyst for a change in fortunes, but this failed to happen in 2025. An unexpected announcement that failed to improve investor sentiment came in the form of a government proposal in early November to switch some renewables subsidies from the retail prices index measure of inflation to the lower consumer prices index measure. This was confirmed in late January.

In terms of the other trust departure from the 2026 line-up, my hand was forced by Henderson International Income merging with JPMorgan Global Growth & Income.

Performance woes, but duo retained

Elsewhere, serious consideration was given to Merchants’ place in the portfolio on the back of it underperforming its sector over one and three years, although it has outperformed over five years, returning 84.7% versus 67.0%.

However, I was swayed by reading up on how upbeat fund manager Simon Gergel is on the prospects for medium-sized companies (mid-caps), which lagged the FTSE 100 rally in 2025. This part of the market, which contains more domestically focused businesses, accounts for over a third of the trust’s assets. Gergel notes that valuations are cheaper in this area and the dividend yield for the mid-cap index is notably higher than the FTSE 100 index, which, he says, hasn’t happened for more than 20 years.

I also mulled JPMorgan Global Growth & Income’s place in the portfolio after its lacklustre showing in 2025. However, it has been a solid performer over longer time periods, and while it is US-heavy, it is the only trust in the portfolio offering exposure to shares listed across the pond.

Moreover, it is the only holding that provides exposure to the US technology giants, meaning the portfolio is not disproportionately weighted towards the fortunes of the US market.  

While there’s the risk of US returns being lower on the back of high valuations, as well as concerns over AI overspending, the opposite scenario could well play out. It would be a bold call to completely bet against the US market over the long term due to its abundance of innovative and entrepreneurial businesses.

• Seven pension tips to get you retirement ready
• How we invest and lessons learnt

The two new entries

One weapon that trusts have in their armoury is the ability to dip into their capital gains to boost payouts to generate an enhanced dividend. The attraction of this for income investors is that they can benefit from growth-oriented trusts without having to cash in shares to boost their income. The potential downside is the possibility of some capital erosion in a period of prolonged market falls.

Over the past decade, there’s been a big move towards trusts paying an enhanced dividend, with Schroder Japan Growth Fund recently adopting the policy strategy. In the summer of 2024, it announced a switch to an enhanced dividend policy, under which 4% of the average NAV is paid out each financial year. This boosted the fund’s yield from just over 2%, resulting in a much higher level of income. Its current yield is 3.5%, which is significantly higher than its three peers, CC Japan Income & Growth, JPMorgan Japanese and Baillie Gifford Japan Trust, whose yields are 2.5%, 1.2% and 1.1% respectively.

Schroder Japan Trust (LSE:SJG) offers investors a chance to participate in the benefits of Japan’s corporate governance reforms, with companies becoming more shareholder friendly, including being more willing to both pay and increase dividends.

The trust focuses on well-managed, high-quality companies and invests across different sizes and sectors. Masaki Taketsume has been at the helm since July 2019.

Moreover, there are a lot of reasons to be positive on the outlook for Japan, including the economy exiting deflation. Therefore, I was keen to introduce exposure to the country, and the enhanced income policy wins out due to its decent starting yield.

• Are high fees chipping away at your investment returns?
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

The other new name to enter the portfolio is TR Property (LSE:TRY). It invests in listed European property-related securities but is also permitted an allocation (of up to 15%) to physical property.

With interest rates falling, and expected to decline further in 2026, the backdrop is becoming more favourable for an asset class that’s been out in the cold for a number of years.

In its latest update (for the six-month period to 30 September 2025), the trust noted that full dividend cover is moving back into sight amid a recovery in earnings across the sector, with most of its holdings increasing dividends year on year.

Over the past couple of years, the revenue reserves have been tapped in order to pay a rising dividend. In the update, the trust said it expects to utilise those reserves again, but only modestly, at its financial year end (31 March 2026).

With a 4.8% dividend yield, a 15-year track record of growing its dividends each year, and an experienced manager in Marcus Phayre-Mudge who has been at the helm for over two decades, I am hopeful of a recovery playing out, but in the meantime investors are being paid to wait with the income on offer.

Asset allocation

In terms of asset allocation, I’ve made slight tweaks from last year with 40% in UK equity income (down from 45% a year ago), 35% in global/overseas income, 15% in bonds (up from 10% a year ago) and the new weighting of 10% in property at the expense of renewable energy infrastructure.

Upping exposure to bonds helps increase the portfolio’s overall yield to 5%, which is particularly useful given that UK equity income trust City of London now has a lower starting yield versus a year ago.

If City of London had a 15% weighting instead of TwentyFour Income, which is yielding 9.8%, the portfolio yield would fall just below 4.8%.

At a glance: how the other trusts kept in the portfolio invest

City of London

Managed by veteran fund manager Job Curtis since 1991, the trust mainly invests in FTSE 100 firms that demonstrate good prospects for growing their profits and dividends. This “Steady Eddie” investment trust is a reliable dividend payer, having increased payouts each year since 1966.  

Dunedin Income Growth

Managed by Rebecca Maclean and Ben Ritchie, this is a concentrated portfolio of best ideas, consisting of around 36 stocks with a focus on both dividend growth and capital growth. The trust has a sustainable investment approach and can hold up to 25% in overseas stocks.

In September 2025, it announced that an enhanced dividend policy would be introduced, which has pushed the yield above 6%. Discover more details by watching our recent video interview with Maclean via the link below.

• Why we’ve boosted our dividend to yield above 6%

Diverse Income

This trust invests across the UK equity market but typically has a bias towards UK smaller companies. Fund managers Gervais Williams and Martin Turner run a diversified portfolio of around 100 companies, with the aim of delivering an attractive and growing dividend coupled with capital growth over the long term.

Merchants Trust

Aims to deliver an above-average level of income and income growth, as well long-term growth of capital, through investing mainly in higher-yielding large UK companies. It’s a dividend hero, having raised payouts for 43 consecutive years.

JPMorgan Global Growth & Income

Seeks to outperform the MSCI All Country World index over the long term. It’s “style-neutral”, meaning that it doesn’t favour value or growth, for example. It holds around 50 “best idea” stocks. The trust aims to pay dividends totalling at least 4% a year. 

Utilico Emerging Markets

The trust’s approach is very different from peers as it focuses on investing predominantly in infrastructure and utility companies across the emerging markets. The trust is run by Charles Jillings, who has more than 30 years’ experience. Jacqueline Broers became joint manager in January 2025.

While the trust’s primary aim is to deliver long-term capital growth, it also provides a quarterly income and has offered a much higher dividend yield than the market over time.

TwentyFour Income

This bond portfolio invests in high-yielding UK and European asset-backed securities, which include pools of corporate loans (called Collateralised Loan Obligations, or CLOs) and packages of loans linked to mortgages.

It targets a total return of between 6% and 9% each year. Figures from Winterflood show that over the past five years its NAV return has been at the top end of this range, delivering 8.8%. The share price total return was 10.6% annualised over the same period.

All income generated is paid out to shareholders. The current yield is 9.8%.

Fund firm TwentyFour is a bonds specialist, with all its funds and investment trusts investing in the asset class.  

Investment trusts have an income edge

Investment trusts can hold back up to 15% of the income generated from the underlying holdings each year. In leaner periods, such as during the global financial crisis and the Covid-19 pandemic, many investment trusts maintained or increased their dividends by dipping into income retained during better times.

Fortunately, many income-focused investment trusts hold significant income reserves, which have been built up over time during periods of dividend strength.

In contrast, most funds pay out lower dividends as they cannot hold back income and are required to distribute all the income received each year to investors. So, when there’s a shortage of dividend cheques during challenging times, funds have no get-out-of-jail-free card and dividend cuts are pretty much inevitable.

How the revenue reserve actually works

It’s easy to get the impression that the revenue reserve is somehow “ring-fenced”, but that’s not the case. In reality, it amounts to little more than an accounting tactic, an entry in the books to show retained revenue. That money is part of the trust’s NAV and is invested in the same way as the rest of the portfolio. If some of it is needed to top up dividend distributions, then the manager has to sell holdings or dip into the cash element and the NAV is affected. 

Of course, even for those investment trusts with healthy income reserves, there’s no guarantee that dividends will be maintained or increased.  

Purpose of the portfolio

The hypothetical portfolio has been created to show DIY investors how they can build their own diversified income portfolio. The funds are chosen on the basis that they would be expected to grow both capital and income over the medium to long term. However, there are no guarantees that this will be achieved.

Remember that overall total returns (capital and income combined) can decline, especially in the short term.