When an investment trust has income in its name, I think it is reasonable to hope it can provide some juicy passive income streams.
Still, a 16% dividend yield sounds as if it may be too good to true. Even the best high-yield portfolios would struggle to deliver that sort of return regularly while investing in high-quality shares.
However, one London-listed investment trust currently has a 16% yield.
Is it sustainable – and ought I to invest?
Income generation potential
The entity in question (specifically it is a venture capital trust) is Income & Growth (LSE: IGV).
In terms of whether the dividend is sustainable at its current level, my feeling is… probably not on a consistent basis. In fact, the trust itself makes no bones about that.
It invests in a variety of small and medium-sized companies that it thinks can keep growing. That means it often holds on to its stake for many years before selling.
That fits well with my own long-term approach to investing. But it means that cash flows can move up and down a lot, meaning its ability to pay a certain level of dividend one year might not be the same in the following one.
But it does have the stated aim of paying an annual dividend of at least 6p per share. That equates to a 9% prospective dividend yield (if not greater) at the current share price.
Can the business strategy deliver?
While this year’s bumper 16% yield appeals to me, 9% would suit me just fine too.
But the 6p per share annual target is just that — a target. There is no guarantee the investment trust will meet it. All shares carry risks, so none is ever completely a ‘no-brainer’ in my opinion.
However, I think Income & Growth’s track record has proved that its business model of buying stakes in a range of small and medium-sized firms with promising commercial prospects can be a lucrative one.
Whether that continues to be the case will depend on how well the fund managers select new investments and manage their existing portfolio.
A weak economy can expose weak business models. Some businesses that might have been able to grow fast when money was plentiful and customer demand was riding high may struggle more in the current lacklustre financial environment. That could hurt profits at the trust.
Proven strategy
Set against that risk however, Income & Growth has experience of investing against an underwhelming economic backdrop.
Even for its 2020 financial year, when a lot of far larger companies cut or even cancelled their dividends, the small trust managed to pay out 14p per share in dividends, following up the next year with 9p per share.
I like the simple but proven strategy of Income & Growth.
I think it offers a potentially lucrative source of future dividends. With an eye on the passive income opportunity, if I had spare cash to invest I would be happy to add this investment trust to my portfolio.
