When I started investing, I found it difficult to generate a diversified income when I only had enough cash to buy a few shares. I found that buying investment trusts was a great solution to this problem.
39 years of dividend growth
Merchants Trust (LSE: MRCH) offers a 4.9% dividend yield and has increased its dividend for 39 consecutive years. The trust typically invests in large FTSE 100 companies which pay regular dividends. Top holdings at the end of November included GlaxoSmithKline, British American Tobacco and National Grid.
This conservative strategy isn’t likely to win any medals for rapid growth. But Merchants’ managers are able to boost their returns by using debt to buy shares. This has worked well recently — Merchants Trust’s share price rose by more than 20% in 2021, compared to less than 15% for the FTSE 100.
Using debt adds risk, as it can increase losses during a market crash. Another risk I can see is that GlaxoSmithKline, the trust’s largest holding, is planning to cut its payout next year.
However, Merchants Trust has experienced managers and a long track record. I’d be happy to park some of my cash in this trust in 2022.
My next pick is renewable energy stock Foresight Solar Fund (LSE: FSFL). Despite its name, Foresight is also an investment trust.
Foresight listed on the London Stock Exchange in 2013, making it one of the older renewable stocks on the market. As its name suggests, it generates the majority of its income from investments in solar power assets. These have a total capacity of over 1GW.
The UK is obviously not the most attractive location for solar power, but Foresight isn’t limited to its home market. The trust also has solar assets in Australia and Spain and is expanding into battery storage.
Foresight shares currently offer a tempting 6.9% dividend yield. The main risk I can see is that, in the future, government subsidies for solar power will gradually be withdrawn. This could leave the trust more exposed to uncertain wholesale electricity prices, putting pressure on the dividend.
For now, Foresight’s 6.9% payout looks safe to me. I’m thinking about adding some to my portfolio this year.
This investment trust offers a defensive 5% income
Supermarkets are one of the most defensive businesses in the world, in my view. Whatever else is happening in life, we’ll always need to do regular food shopping.
One investment trust that’s delivered a steady performance in recent years is Supermarket Income REIT (LSE: SUPR). This real estate investment trust specialises in buying supermarket properties and leasing them back to operators such as Tesco and Sainsbury’s.
Leases on big supermarkets are generally long, with clearly-defined payments. For example, it recently acquired a Tesco supermarket with 17 years remaining on its current lease. This means the trust has good visibility of future cash flow — useful for dividends.
A risk I can see here is that the market for supermarket property is quite strong at the moment. Prices are quite high. If interest rates rise, or property prices fall, then I think Supermarket Income REIT’s dividends could come under pressure.
However, the current situation still looks comfortable to me. With a forecast dividend yield of 5% in 2022, I am considering Supermarket Income for my portfolio.