Finding sources of income which are ahead of inflation has become more difficult in the last couple of years. However, even with inflation at 3%, it is still possible to generate a real income return from holding a number of investment trusts. And while many large-cap shares may now offer narrow margins of safety, the key holdings of these two trusts could be viewed as relatively cheap. As such, buying them today could be a shrewd move.
Reporting on Monday was Troy Income & Growth Trust (LSE: TIGT). It has experienced a somewhat disappointing year, with its share price total return of 4% being well down on the FTSE All-Share’s rise of 11.9%. The main reason for this was the company’s style, with it being focused on defensive stocks which have generally been unpopular among investors during the last year.
However, this could create an opportunity for investors with a long-term timeframe. The trust currently trades at a small discount of 0.45% to its net asset value (NAV), while many of its major holdings appear to be relatively cheap. For example, Lloyds, British American Tobacco and GlaxoSmithKline are all among its top 10 holdings. All three stocks as well as other major holdings trade on historically low ratings at the present time, and this could signal that the trust has value appeal.
As well as this, Troy Income & Growth Trust has a dividend yield of 3.3%. This is above the rate of inflation and with many of its major holdings appearing to have a bright long-term future, its dividend growth rate could be above average. As today’s update from the company discusses, risks remain throughout the global economy. Therefore, its focus on defensive stocks could be rewarded in the long run.
More dividend growth potential
Also offering impressive income prospects is Edinburgh Investment Trust (LSE: EDIN). The company has also experienced a difficult year. Its return in the last year has been just 3.2% versus an increase of 13.8% for its UK Equity Income benchmark. However, with it now trading at a discount of 8.4% to its NAV, the company could offer good value for money for the long term.
It has a dividend yield of 3.7% at the present time. Its major holdings include a number of stocks which could offer high and yet reliable dividend growth in future years. For example, Imperial Brands has a solid track record of dividend growth which looks set to continue as it invests in new products. Likewise, AstraZeneca is expected to return to positive bottom line growth after a period of declines, and this could mean it is able to afford a higher shareholder payout.
As such, while Edinburgh Investment Trust has been a relatively disappointing place to invest in recent months, its long-term future appears to be bright. A mix of defensive characteristics, a relatively high yield and a wide margin of safety could mean it delivers strong income prospects over the coming years.
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Peter Stephens owns shares in Lloyds, GlaxoSmithKline, AstraZeneca, Imperial Brands and British American Tobacco. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca, Imperial Brands, and Lloyds Banking Group. 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.