3 reasons to buy investment trusts

Investment trusts have been paying out the biggest total amount of dividends in history. Our writer explains why he would consider investing in them.

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Last year was the best one on record for the total size of dividends paid by investment trusts, according to Link Group. In the year to March, the payouts totalled more than £5bn.

At the moment I do not own any shares in investment trusts. But I have done in the past and would consider doing so again now. Here are three reasons I think they could be a good fit for my portfolio.

1. Dividend potential

There are different sorts of investment trusts. Some focus on income as an investing objective, while others are geared towards growth opportunities. Some try to offer a blend of both.

Owning shares is one of my favourite passive income ideas. I feel that investment trusts can be a good way for me to achieve this goal. For example, two trusts I have been eyeing lately as possible additions to my portfolio are European Assets Trust and JPMorgan China Growth & Income. Right now, they are yielding 9.0% and 5.1% respectively. I would be happy to have either of those dividend streams in my portfolio.

Investment trusts can also keep back some of the dividends they receive. That can allow them to maintain their dividend even in a year when their own income falls. That can only work for so long, of course. Ultimately, to keep paying out dividends, the investment trust itself needs to receive income from the shares it owns. That is never guaranteed.

2. Investment trusts and diversification

One of the key risk management principles I apply to investing is diversification. Some investors seem to think that risk management is just something for shareholders with lots of money at stake to worry about. I think that, as a private investor with a limited amount of money, risk management is as important for me as it is for anyone.

By buying shares in a wide range of companies and business sectors, I can reduce the impact on my overall portfolio if some of them do badly. But that can eat up a lot of money, as I need to pay separate dealing charges for each transaction. That is where an investment trust might help me. By buying shares in such a trust, I would only pay one set of dealing charges. But I could have the benefit of diversification, as many trusts own dozens of different shares.

That diversification may come at a cost, though. Investment trusts usually charge an annual fee. That would eat into the returns I could get from owning shares in the trust.

3. Professional management

One of the arguments in favour of such a fee is that it helps the trust cover the cost of professional managers.

Investors do not all agree on whether active management of a trust is helpful, compared to simply tracking an index. Managers can make bad choices, meaning the investment trust loses value.

However, I believe that the right skilled managers can bring knowledge, experience, and dedication to a trust. In some cases at least, that can lead to impressive results. By buying shares in an investment trust, I could hopefully benefit from that.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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