Investing for income is gaining popularity as investors shy away from growth investing. If you're looking for a solid way to prosper in this changing economic climate with minimal effort, investment trusts could be the answer. This comprehensive guide covers all the ins and outs of finding top income-focused investment trusts. By the end, you'll know what to look for, what to avoid, and even discover some popular options that dividend-hungry investors have been gobbling up.
What is an Investment Trust?
An investment trust is a "closed-ended fund" that operates like a publicly-listed company with a fixed number of shares. These trusts have specific goals and investing methods, focusing on sectors, regions, or assets. To invest, you buy shares in the trust, and their value is determined by the trust's performance.
Illustration: Happy dividend income investment trusts investors jumping on a road
Advantages of Investment Trusts
Investment trusts offer several advantages, including:
- Shares are fixed, allowing portfolio managers to avoid selling investments when shareholders withdraw money.
- Expert management of holdings.
- Ability to use gearing for maximizing returns (but also increasing losses in some cases).
- Access to investing in private firms that the public can't access.
- Pooling money with other investors for buying illiquid assets or large stakes in companies.
- Dividend payments can be made more stable by setting aside up to 15% of income for future payments.
- Ease of buying and selling shares.
- Competitive fees compared to actively managed funds.
Why Use Investment Trusts for Income?
The main advantage of using investment trusts for income is that experienced managers can seek out the best dividends globally. Dividends are pay-outs from companies to shareholders if they generate enough profit. Income fund managers carefully select companies that consistently pay dividends, allowing investors to benefit from regular income. Investment trusts have a vast range of options, from sturdy British firms to obscure international investments, providing a reliable and steady income.
Illustration: Woman happy holding investment trust income in hand
What Makes a Good Income Investment Trust?
When searching for an income investment trust, look for the following key factors:
- Reliable and consistent track record.
- Stability.
- Performance during tough periods.
- Qualifications and expertise of portfolio managers.
While this may seem like a lot of work, there are simple shortcuts you can take to assess the trust's suitability.
Where to Find the Best Investment Trusts for Income
The Association of Investment Companies (AIC) is an excellent resource for finding top investment trusts for income. They maintain a "dividend heroes" list, highlighting trusts that have consistently increased dividend income for many consecutive years. Other resources like Morningstar and Trustnet can provide in-depth information for researching investment trusts.
Illustration: Woman writing investment trust income research notes and using a laptop
Popular Income Investment Trusts
Here are a few examples of income investment trusts that are extremely popular among investors:
- City of London (CTY)
- Bankers Trust (BNKR)
- Scottish American (SAIN)
- F&C Investment Trust (FCIT)
- abrdn Equity Income Trust (AEI)
- Caledonia Investments (CLDN)
If you're already using an investment platform like AJBell, eToro, or Hargreaves Lansdown, you can search for these trusts to find more information.
What Investors Should Be Wary Of
While investment trusts offer numerous benefits, there are still areas to watch out for:
- Fees: Some trusts charge high fees, which can significantly impact your income.
- High yields: If a trust promises unusually high dividends, proceed with caution and thoroughly research it.
- Gearing risk: Borrowing money to boost gains also increases the risk of losses if assets perform poorly.
- Poor management: Mistakes can happen, so stay informed and monitor the trust's management.
- Premium/discount: The share price may not accurately reflect the trust's asset value, leading to a premium or discount depending on the market.
How to Invest in Income Investment Trusts
To invest in income investment trusts, you'll need a brokerage account offering a wide selection of investments. Some trusts are listed on the FTSE 100, while others may only be available on specific platforms. Once you've identified a suitable trust, find a broker that allows you to invest and purchase shares like any other investment.
What Else Should Income Investors Know?
Income investors don't have to limit themselves to a single investment trust. Diversification is key, so consider using multiple trusts to ensure your dividends come from various sources, such as stocks, shares, commodities, property, private equity, and bonds. Additionally, keeping up with the latest market movements by subscribing to the MoneyMagpie Investing Newsletter can provide valuable insights.
Remember, this article does not serve as financial or investment advice. Always conduct your own research and consult with a professional advisor before making any financial decisions.
