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How to Maximize Your Income with Investment Trusts

CEO Khai Intela
Investing for income has become increasingly popular as investors veer away from growth-focused investments. One avenue that can help you prosper in this economic climate is investing in income-focused investment trusts. With minimal effort on...

Investing for income has become increasingly popular as investors veer away from growth-focused investments. One avenue that can help you prosper in this economic climate is investing in income-focused investment trusts. With minimal effort on your part, these trusts can provide a solid source of income. In this article, we will dive into the ins and outs of finding the best income-focused investment trusts. You'll learn what to look for, what to avoid, and discover popular options that have caught the attention of dividend-hungry investors.

What Sets Investment Trusts Apart?

An investment trust is a type of "closed-ended fund" that operates as an actual company with a fixed number of shares. Unlike other investment funds, investment trusts can be found on major stock exchanges such as the FTSE. Each trust has its own investment goals and strategies, some of which focus specifically on generating income. By investing in shares of the trust, you can profit from the performance of the underlying investments.

The Advantages of Investment Trusts

Investment trusts offer several benefits, including:

  • Liquidity: Unlike other funds, investment trusts do not need to sell investments when shareholders wish to withdraw money.
  • Expert Management: Trusts are managed by teams of experts who handle the investments.
  • Gearing: Investment trusts have the ability to borrow money to maximize returns, although this can also increase losses.
  • Access to Private Firms: Some investment trusts invest in private firms that are not accessible to the general public.
  • Pooling of Resources: By pooling money with other investors, investment trusts can acquire large illiquid assets or significant stakes in companies.
  • Stabilized Dividend Payments: Trusts can set aside up to 15% of income to ensure more stable dividend payments.
  • Ease of Buying and Selling: Shares of investment trusts are easy to buy and sell.
  • Competitive Fees: Fees for investment trusts can be competitive compared to actively managed funds.

happy dividend income investment trusts investors Caption: Happy dividend income investment trusts investors

Utilizing Investment Trusts for Income

One of the main reasons to use investment trusts for generating income is that the fund managers can identify the best dividend-paying companies worldwide. Dividends are payouts that companies distribute to their shareholders if they generate sufficient profit. Income fund managers carefully select companies that consistently provide dividends. This may involve investing in solid British firms or exploring more unconventional opportunities from around the globe. Investment trusts' wide access to regular investments and niche opportunities provides an excellent chance to secure a reliable income stream.

Investors should note that dividend payments are not guaranteed. However, many investment trusts have a long history of consistent payouts, even during challenging times.

Smoothing Returns

One of the standout features of investment trusts is their ability to set aside a portion of income for future dividend payments. This was evident during the coronavirus pandemic when many dividend-paying stocks faced significant challenges. Some investment trusts were able to maintain their dividend payments by utilizing their reserves. This feature offers investors peace of mind and stability during periods of market volatility.

woman happy holding investment trust income Caption: Woman happy holding investment trust income in hand

Key Considerations for Income Investment Trusts

When searching for income investment trusts, there are several important factors to consider:

  1. Reliable and Consistent Track Record: Look for trusts with a proven history of reliable dividend payments.
  2. Stability: Consider how the trust has performed during challenging economic periods.
  3. Management Expertise: Assess the qualifications and experience of the portfolio managers.
  4. Research and Shortcut Resources: While researching investment trusts may seem daunting, resources such as the Association of Investment Companies (AIC) provide valuable information. The AIC's "dividend heroes" list highlights trusts with a long and consistent history of increasing dividend income. Additional resources, such as Morningstar and Trustnet, can offer further insights.

Popular Income Investment Trusts

Here are a few examples of income investment trusts that have gained popularity 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 are already signed up with a brokerage platform like AJBell, eToro, or Hargreaves Lansdown, you can search for these trusts and find more information about each one.

Areas to Be Cautious About

While investment trusts offer numerous advantages, it's important to remain mindful of potential pitfalls. Consider the following:

  • Fees: Some trusts charge high fees that can significantly impact your overall income.
  • High Yields: Be cautious of trusts that promise unusually high dividend yields; they may be too good to be true.
  • Gearing Risk: The ability to borrow money can amplify gains, but it also increases the potential for losses.
  • Management Quality: Keep track of any mistakes made by trust managers, as frequent errors may indicate deeper issues.
  • Premium/Discount: The market value of trust shares may not always reflect the true value of the underlying assets, resulting in premiums or discounts.

Woman writing investment trust income researchnotes Caption: Woman writing investment trust income research notes

How to Invest in Income Investment Trusts

To invest in income investment trusts, you'll need a brokerage account that offers a wide selection of investments. While some trusts are large and listed on the FTSE 100, others are only available on specific platforms. Once you have identified the trust that aligns with your investment goals, check which brokers allow you to invest in it. Buying shares is straightforward and follows the same process as any other investment.

Diversify Your Income Portfolio

You are not limited to investing in a single income investment trust. Consider diversifying your portfolio with a few different trusts to ensure a wide range of income sources. By investing in various sectors, such as stocks, shares, commodities, property, private equity, and bonds, you can create a well-rounded income stream.

It's also essential to stay informed about the latest market movements. Signing up for the MoneyMagpie Investing Newsletter can keep you up to date.

Remember, this article does not provide financial or investment advice. Conduct thorough research and consult with a professional advisor before making any investment decisions.