Why income investors shouldn’t overlook investment trusts

Trusts have the ability to help power income portfolios, says interactive investor.

• Six out of 10 constituents of ii Active Income model portfolio are investment trusts

Against a challenging backdrop, and after a pandemic-induced raft of dividend cuts and suspensions last year for UK plc, many investment trusts have once again shown their mettle from an income perspective, although it hasn’t always been plain sailing for everyone.

The Association of Investment Companies (AIC) this week updated its roster of ‘dividend heroes’, celebrating 19 investment trusts that not only weathered the Covid dividend drought but managed to increase payouts for 20 or more years in a row.

It is another good reason not to overlook investment trusts, says interactive investor, the UK’s second-largest investment platform for DIY investors. While popular with active private investors, trusts remain all too often overlooked. Less than 10% of financial advisers recommend investment trusts regularly, according to the AIC, and funds still have a considerably higher profile.

Investment trusts help power interactive investor’s Active Income model portfolio*, accounting for six out of 10 holdings and 55% of the portfolio by asset allocation. They are: City of London (LSE:CTY); Bankers (LSE:BNKR); Murray International (LSE:MYI); Utilico Emerging Markets (LSE:UEM); BMO Commercial Property (LSE:BCPT) and Standard Life Private Equity (LSE:SLPE). Two of these are AIC dividend heroes – City of London and Bankers have each racked up 54 years of annual dividend increases, according to the AIC.

However, it is important to note that it won’t always be a smooth ride, and indeed BMO Commercial Property suspended its monthly payments last April over uncertainty on rental receipts, particularly for retail and leisure tenants in light of the pandemic. In August, the dividend was reinstated, albeit at a lower rate. In December, the trust announced an increase on recent monthly interim dividends equating to 70% of the original monthly rate paid up until March 2020.

The ii Active Income portfolio is currently a yielding 3.6%. While ii does the heavy lifting, with research and recommendations, and advise when rebalancing is required, the underlying holdings have to be bought individually – so it may not be a low-cost strategy for investors with smaller amounts, unless you are a monthly investor (and it certainly isn’t for the faint-hearted). Since ii scrapped its regular investing charge, investors who elect for the selections to be bought automatically each month can buy each of the 10 portfolio constituents for free.

Dzmitry Lipski, Head of Funds Research, interactive investor, says: “The moral of the story is do not overlook investment trusts when constructing a dividend portfolio – they have the ability to help power income portfolios. It won’t always be plain sailing, there are no guarantees.  It is also important to have an open mind and look at trusts and funds side by side. But many investment trusts have proved to be heroes for income investors time and again and they are worth considering as part of a diversified portfolio.

“Investment trusts have a structural advantage of being able to stash away up to 15% of the income they received each year, which means a number have been able to build up a healthy reserve to bolster payouts in leaner years.”

interactive investor Active Income portfolio

* To view the ongoing charges and combined figure for the portfolio based on current portfolio weighting see here

Notes to editors

*The interactive investor Active Income model portfolio is designed for investors who are looking for income and are interested in investing in active fund managers.

While ii does the heavy lifting, with research and recommendations, and advise when rebalancing is required, the underlying holdings must be bought individually.