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Creating a steady income stream for clients

22 August 2018

There is good news for investors wishing to use their long-term savings to generate a steady income stream, with investment trusts proving lucrative over the past 10 years, according to AJ Bell.

The investment platform compiled a list of the “ultimate income investment trusts”, which yield up to 10% on a 10-year basis. At the top of the table was British & American with a 10.4% yield.

It was the only trust in the table whose share price fell during the 10-year period, but despite this, the effect of dividends over the past 10 years means investors selling today who had reinvested dividends would still be up more than 139% over that period on a total return basis.

The platform said investment trusts are particularly suited to providing steady income for investors, as their structure allows them to withhold up to 15% of the income they receive each year in order to be used in future years when dividends may be lower. This means managers can invest over the long-term and ride out market volatility, without being forced to sell.

The list shows that a total of 21 trusts yield 6% or more, based on an individual buying the trust 10 years ago, while 12 yield 7% or more.

Trusts such as Schroder Oriental Income would have turned £10,000 into £39,000 over the past decade with dividends reinvested and generate an annual income of £900. Meanwhile, Henderson Smaller Companies delivered one of the highest total returns, turning £10,000 into £51,700, and generating an annual income of £790 in 2018.

Laura Suter, personal finance analyst, AJ Bell, said: “These figures will be eye opening for the hundreds of thousands of investors who want to use their long-term savings to generate a steady income stream.

“What makes the trusts more compelling is their proven ability to increase these payouts each year. Any investor would be pretty happy with City of London investment trust yielding 7.1% based on 2008’s price, coupled with a 51-year track record of increasing its payout, or Caledonia’s 8.6% 10-year yield, with 50 years of increased dividends.”

AJ Bell said the total return figures were testament to the benefits of reinvesting dividends for investors who are not reliant on the income now.

The results also showed that investment trusts that focused on smaller companies delivered the largest total returns, led by BlackRock Smaller Companies with a 480.8% return since 2008, followed by BlackRock Throgmorton at 478.5% and Standard Life Smaller Companies at 431.2%.

Suter continued: “The figures show that investors often have to decide between jam today and jam tomorrow, with income often coming at the price of lower capital growth, or vice versa. With the example of British & American investors would be seeing a solid dividend yield today, but would have sacrificed capital growth over that period.

“Conversely, some of the lower yielding trusts based on the investor buying in 2008 have delivered some of the highest total returns. Examples include Scottish Mortgage, which is only yielding 2.4% but has delivered one of the highest total returns at 438%.

“That said, even the lowest yielding trusts have proven their ability to hand investors a reliable and growing income each year for at least 10 years, making them particularly attractive for those using the pension freedoms in retirement relying on the income to fund their lifestyle.”

Professional Paraplanner