Investment Trusts For Income

Since I had a bit of holiday, I’ve had a bit more time to actually sit down and read and think a bit more about investing into a new investment category for my value stocks/dividend income NISA – Investment Trusts for income. I’ve never bought these in my NISA before, although I do have some in my SIPP. Sometimes, Investment Trusts (ITs) are said to be the ‘hidden jewels’ of investing – some have been paying out growing dividends for many decades – there are at least ten ITs who have a 40+ year dividend growth history. This is pretty awesome, so why don’t we know more about ITs as value and dividend growth investors? What does Weenie know, that I don’t?

Well, ITs are basically just not very sexy. However, that means they are just the kind of boring, probably fairly safe, and potentially more reliable type of investment we might be looking for to provide a stable, growing income over time. An investment that can grow its dividend year-in, year-out; without resorting to crazy borrowing, or lowering dividend cover too much. Now, if they are able to increase their dividend safely, that means they could be a pretty awesome buy, right? Well, it depends.

The yields on ITs tend to be a bit lower than what I’m generally looking for (3%+). This is because Investment Trusts have a rather special quality – they are allowed to save some of their income in the good years to smooth out the lower income in the bad years. This sounds pretty sensible, don’t you think? It’s like having an emergency fund built-in to the IT.

Key Facts About Investment Trusts

An investment trust is a fund – they’re basically a pot of money which has been pooled by lots of people, like you and me, and then invested into something. But there is a key difference with ITs – they are closed-ended, unlike regular (sexier?) funds. Closed-ended means that the IT does not usually issue new shares, although very occasionally this may happen.
They trade just like shares in any stock on the stock market i.e. you can buy them at varying prices throughout the day, just like stocks.
ITs might sell at above or below the value of their underlying assets. You will see the terms ‘premium’ and ‘discount’ to NAV (net asset value). Obviously, a discount to NAV means that you’re getting the IT on the cheap, as it’s discounted compared to the value of what it owns. This is because ITs trade according to supply and demand, just like stocks.
I mentioned they are allowed to save some of their income to smooth out the bad years, but ITs are also allowed to borrow money to invest (called gearing). Again, this is kind of obvious, but if they borrow and their investment pays off, they can make enormous profits; if they borrow and lose, their losses are amplified (scary stuff!)

Useful Articles about Investment Trusts

To get started, it’s good to start reading around the subject. Here are three interesting articles to get you into the feel of things:

How to Research Investment Trusts

Now that you’ve got a feel things, you may want to start researching investment trusts for income. I mentioned ITs are sometimes known as ‘hidden jewels’, well this isn’t just because they are not very sexy and thus less well-known, but also because they seem harder to research compared to stocks. However, here are some decent websites to have a look at if you want to start researching ITs:

Morningstar’s website looks a bit dull to some people, however they do have quite a lot of educational posts on their site, which can be pretty useful. For example, they do videos and post the transcripts with them, such as this one about gearing.

And I’ll just give you one last article, which you may find particularly useful – which ITs pay monthly, quarterly, bi-annually, or yearly. I’ve often referred back to this article, since I’m currently building my ITs research spreadsheet, wherein I’m gathering all the key info I need on each trust in which I’m interested.

Do you invest in ITs? If not, why not? Let me know, leave a comment below!

Published by Editorial Team