Putting savings into investment trusts addresses many of the fundamental questions investors ask themselves, namely how do I own a large number of companies and how do I generate more income year-on-year? I think owning shares in a high-yielding investment trust can help generate a passive income. It could make a big difference to how you retire, especially if you have no savings.
Investing in the UK’s biggest and best
Merchants Trust (LSE: MRCH) aims to provide an above-average level of income, plus income growth and long-term growth of capital by investing mainly in higher-yielding large UK companies. The portfolio holds a host of high-profile companies such as Royal Dutch Shell, GlaxoSmithKline and Barclays. About two-thirds of the trust is invested in the FTSE 100 with a further 25% in the FTSE 250. The rest is divided between small-caps and cash.
The dividend is paid quarterly, which is good if you want to create a passive income ahead of retirement. It means you can invest in more shares or take the cash as income, although the former will help you build a shares portfolio far more quickly, especially if you have no savings. The yield has been pushed down by recent strong share price growth, but still provides over 4%, which is more or less in line with the FTSE 100.
A slow and steady, year-on-year increase in the dividend gives me confidence that it’s ideally placed to generate a passive income to help you retire richer.
That, alongside the ability of investment trusts to hold reserves to see investors through any leaner years, makes them potentially very financially rewarding and probably the cornerstone of a good investment portfolio. This is why I also like the look of this second investment trust.
Another above-average yielder
Dunedin Income Growth Investment Trust (LSE: DIG) is another one that is yielding over 4%. It also holds a number of the same higher-yielding companies as Merchants Trust, but it has different top holdings, such as Assura, RELX and Diageo.
Besides the yield, one of the big perks of this investment trust is that it trades at a discount to what it’s actually worth. Good for investors who want to buy up the shares. The discount is 7%, which is only a little less than the 12-month historical average discount that has been nearer 8%. Again, a rise in the share price following the market bounce post-election has contributed to the narrowing of the discount.
Cumulatively over the three years to 30 November 2019, the shares rose by a third and the dividend has been rising year-on-year and is paid quarterly.
Overall I think these investment trusts are ideal for someone approaching the end of their working life who wants to retire better off. They provide diversified access to a large number of larger companies and a generous dividend yield that is often more than the average for the FTSE 100.