We name 10 trusts that leave ANY savings account way behind (2024)

Although it's not perfect by any stretch of the imagination, the new world of wealth platforms has empowered millions of us to take control of our investments.

Helped by supporting legislation – none more key than the pension freedom rules of 2015 – we can now all manage our tax-friendly Isas, investment portfolios and pensions from the comfort of our front room.

Transactions completed online at the click of a button. All relatively easy, all relatively inexpensive and all rather important when our retirement finances may need to last us until well into our 90s.

Oh, and all rather fun when things are going well – and not so joyous when stock markets are in freefall or a fund manager (step forward Neil Woodford) lets us down badly.

Of course, not everyone is comfortable with taking on such financial responsibility, which is why professional wealth advisers exist – to assist those who would prefer to delegate the management of their investments to an 'expert'.

And we must not forget the elephant in the room that is Labour, a party intent on putting a spanner in the investment works in the form of higher taxes. Spiteful tax increases – on dividend income and capital gains from share sales – that would compromise our ability to manage our investments efficiently.

But as fund manager Jamie Ward says opposite, we must hope (and pray) that a Labour victory on December 12 is a 'high impact, low probability event'. A non-event.

But let's discard the hypothetical and horrible for the time being and look at how this new-found financial freedom can be used to generate an attractive monthly income from a portfolio of investment trusts.

Regular income better than that available from any savings account and which could prove particularly attractive to those who need income from their self-invested pension – or Isa – to top up their finances in retirement (a requirement of many Wealth readers). The resulting portfolio we have constructed delivered an income over the past 12 months of just short of 4.4 per cent.

Yes, the income does not come without risks. After all, it's derived from a portfolio of funds invested in stock markets that go up and down, so the capital value of the portfolio may be challenged occasionally.

But there's a good chance of the income growing over time. In other words, an income in excess of 4.4 per cent per annum. Attractive, eh? You bet it is.

THE STARTING POINT – INVESTMENT TRUSTS

So, how can we get such a mouth-watering level of income? The starting point is a basket of investment trusts picked for their income-friendliness.

Investment trusts are listed on the UK stock market and like any public company have shares that investors can buy and sell. Although they come in different shapes and sizes, they are all invested in a portfolio of companies. In other words, they provide investors (shareholders) with in-built diversification.

Investment trusts are managed by the best fund management groups in the country – indeed the world. The likes of Aberdeen Standard, BlackRock, JP Morgan and Janus Henderson. Some better than others. They also tend to have lower ongoing charges than competing investment vehicles such as unit trusts and open-ended investment companies.

The subset of investment trusts we are interested in for the purposes of producing a regular income are those with an income bent. Trusts whose aim is to deliver a mix of income (dividend) and capital return. Income that often is paid quarterly.

Yes, there are unit trusts and OEICs out there – not stock market listed – that have similar income objectives. But income-orientated investment trusts have a special ingredient these rivals don't possess – namely the ability to control the distribution of income they earn from their underlying holdings so that the dividends ultimately paid to shareholders move (most of the time) in an upward trajectory.

They do this by holding back some income in the good years – when companies are paying generous dividends – to distribute when the dividend environment is challenged (maybe as a result of an economic downturn). This smoothing process means a number of trusts have managed to record increases in annual dividend payments to shareholders going back 20 years or more. Gold dust as far as an income- hungry investor is concerned.

BUILDING UP A SOLID PORTFOLIO

Ten income-friendly investment trusts have been chosen to deliver an investor a steady stream of income throughout the year. The regular income is a result of the fact the trusts have different dividend dates, meaning someone holding all ten would be assured of income every month of the calendar year.

The ten trusts are shown in the table above. Five are primarily invested in UK equities – BMO Capital & Income, Dunedin Income Growth (managed by Aberdeen Standard), Invesco Income Growth, Lowland (Janus Henderson) and Merchants (Allianz). The rest are invested internationally.

Reassuringly, all ten have at least enough income tucked away in reserve to pay out the equivalent of 70 per cent of the annual income they distributed to shareholders in their last financial year. In the case of Scottish Investment Trust, it has sufficient income reserves to pay last year's dividends again and again – and still have half a year's dividend payment left over.

To give income-searching investors an idea of the kind of regular income these trusts could provide, we asked the Association of Investment Companies to do some serious number crunching.

Assuming £10,000 was invested in each of these trusts at the end of October last year, we got the association to calculate the monthly dividend stream the resulting £100,000 investment would have generated over the next 12 months.

As the table shows, monthly income ranged from £80.17 (September) to £771.32 in May. Yes, rather uneven but resulting in a year's income of just short of £4,396. In other words, an annual income a tad under 4.4 per cent. Over the 12-month period, the capital value of the £100,000 would have risen to £101,799. In other words, a combined return of £6,195 – nearly 6.2 per cent.

These figures do not take into account the charges that an investor would incur in buying these trusts through a wealth platform (including stamp duty of 0.5 per cent), nor any ongoing fees levied by the platform. These would reduce returns, but their negative impact would be diluted in time as income and capital gains accumulated (hopefully).

OTHER KEY CONSIDERATIONS

Annabel Brodie-Smith, a director of the Association of Investment Companies, says a portfolio of investment companies can be an income investor's 'best friend'. She adds: 'With investors staying invested for longer, often well into retirement, the search for income is often a number one priority. Investment trusts provide a solution.'

The portfolio we have put together above is not the only way to get a regular income from a basket of investment trusts. In May, Wealth constructed another £100,000 income-friendly portfolio based around ten different trusts – BMO Managed Portfolio Income, City of London (run by Janus Henderson), Henderson Far East Income, JP Morgan Claverhouse, JP Morgan Global Growth & Income, Murray International (Aberdeen Standard), Perpetual Income & Growth (Invesco), Schroder Income Growth, Scottish American (Baillie Gifford) and Temple Bar (Investec).

If this portfolio had been constructed at the end of October last year – the same time as used in the table above – it would have delivered 12 months of income totalling a shade over £4,461. The capital value of the £100,000 would also have risen by £4,554. Wealth knows of readers who invested £1 million in this portfolio and are currently happy as punch. If these two portfolios do not quite float your income boat, may I encourage you to take a look at website theaic.co.uk. It has an 'income finder' page that allows you to create your own 'virtual' portfolio of income-friendly investment trusts.

AND A WARNING...

A Labour government will compromise the ability to enhance our wealth. It will do this by taxing dividends and capital gains at our highest marginal rate of income tax. It will also slash our annual dividend and capital gains allowances – the amounts of share income and capital gain we can receive free of tax – down to £1,000.

Some readers may think Labour has as much chance of winning the Election as me winning the £500,000 Thunderball jackpot. Fine, but it may pay to wait until December 13 to make a call. Just in case Corbyn hits the jackpot.