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:
- We love investment trusts, stop hiding them away
- which investment trusts have best inflation beating dividends
- investment trusts that have increased their dividend for 40 years+
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!
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Hey M
Thanks very much for this write up – saves me from having to write one up myself, not that I could have done a better job of it!
“What does Weenie know, that I don’t?”
Haha, not much more than you do, except that I was drawn by their diversity, consistently increasing dividends and their ability to smooth out lower income to offset volatility.
I thought that they would be a nice compliment to my growing share portfolio. I’m not bothered that say Bankers IT has holdings in BP and Diageo (which I also hold as individual stock) – it’s almost as if I’ve just increased my own holdings in those stocks. Plus I don’t have any holdings in non-UK shares, yet Scottish Mortgage IT has holdings in both Amazon and Facebook thus giving me some exposure to those kinds of stocks.
Yield is lower, hence my aim to build a mix and match portfolio with higher yielding shares to balance this out a bit.
Whilst I’m investing in ITs mostly for their dividends, I still intend on putting a bit into Woodford’s Patient Capital Trust at some point for some growth.
I know there are some ITs you won’t invest in due to their having main holdings in tobacco but there is still a good selection that you can choose from to invest in.
Good luck!
weenie recently posted…Same but Different
Great comment. It’s a really good point about the larger holdings such as BP being present in many trusts as well as being a likely contender for a personal dividend stock portfolio. I too am interested in adding some kind of growth element but think I might open a separate account for growth investing, add the NISA has really become just for income purposes
Thanks for sharing about investment trusts. If I understand correctly, these are closed end funds (CEF) – as they are more commonly known in N.America. I had invested in a couple of CEFs/ITs when I was starting out with my investing back in 2008/09 and got burnt as they crashed…In hindsight, I didnt do my due diligence and was chasing yield – and it was quite a learning curve as I was just starting out to learn about investing.
I havent looked at these types of funds in years…I will have to revisit and reevaluate.
Best
R2R
Roadmap2Retire recently posted…Alternative Investments – Supplemental Pension Plan
Hey R2R, you got it. Understand your yield-chasing escapade as I did a bit of that myself, although thankfully did not get wrecked by the last financial crash!
I haven’t invested in Investment Trusts and was interested to read about their ability to “save and smooth out” over the bad years. That’s surely a good idea? Borrowing, not so much. I presume if the managers borrow and win (with your money) they get a big bonus and if they borrow and lose (with your money) they get a slightly less big bonus? Is there a way to tell if a trust is managed aggressively, or not?
I think you can always tell by their history and looking into the gearing, some ITs are really rather famous for being conservatively managed… And yes I do really like the ability to use smoothing!
hi
i have read a lot of researches that say dividend funds are not so good compared to individual DG stocks. Maybe because they pick companies that have specifically high payout ratio and have troubles in recessions ?
what do you think? i am interested also in those funds for diversify buy you need also to pay fees (when you haven’t with individual stocks) …. interesting post
You’re right about the fees, but I’m not sure about the high payout ratios and troubled stocks. However, the recent trend has been for fees to be reduced quite a lot.
In some ways ITs seem like a nice cross between dividend growth investing and buying cheap ETFs or funds.