For income-seeking investors, the investment trust sector has the ability to ride out volatile times to deliver a steady stream of income.
In an environment where income is increasingly elusive, investors and advisers may want to consider the role an investment trust can play in an income portfolio.
Jemma Jackson, public relations manager at the Association of Investment Companies (AIC), explains: “Many of the more generalist investment companies have enviable dividend track records and have become the ‘dividend heroes’ of the collective investment universe.
“Many have been able to increase their dividends year on year for decades, and this is due to the investment company sector’s unique ability to squirrel away some of the income received for more difficult times – a feature that is known as ‘dividend smoothing’.”
Top of the dividend heroes list is the City of London Investment Trust, which has racked up 48 consecutive years of increased dividends, according to figures from the AIC. This is closely followed by Bankers Investment Trust, Alliance Trust and Caledonia Investments, which have each recorded 47 consecutive years of dividend rises.
Ms Jackson notes: “More recently, many investment companies have sought shareholder approval to pay income out of capital, to give an extra string to their bow. This could prove useful in more challenging times.”
While many dividend heroes sit in fairly mainstream sectors, such as the UK equity income and global sectors, James de Sausmarez, director and head of investment trusts at Henderson Global Investors, points to the diversity of income that these trusts can deliver.
He says: “There are the mainstream income opportunities, such as UK equity income, UK high income and Far East income, and even European and global income, but then there are all the alternatives that offer a variety of income. There is a lot of choice out there to put together a really good diversified portfolio.”
Ms Jackson agrees there is “a good deal of choice” for income seekers in the investment trust sector.
She observes: “Some of the highest-yielding investment companies and sectors are in the alternative assets space, such as infrastructure and debt.
“Such sectors have been a huge growth area in recent times, reflecting increased demand for higher-yielding assets, and also the suitability of the closed-ended structure when it comes to alternative assets. This is because managers do not have to sell stock to meet redemptions, so they can take a long-term view of the market.”
Trusts targeting income feature strongly in the list of the most recently launched investment trusts, showing this is something of a trend.
“The new launches we have seen have tended to be in higher-yielding sectors, with five of this year’s new issues offering target yields of 6 per cent or above,” Ms Jackson says.
“Such is the demand for these companies that many are trading on premiums, with a number of companies regularly issuing new shares to help keep up with demand. So it’s worth looking at valuations carefully.”
