Investment trusts have been around for nearly 150 years, but despite their age, they remain a great way to invest for income. Unlike unit trusts and other open-ended funds, their closed-ended structure allows management to make long-term investment decisions and to invest in invest in some illiquid asset classes.
Investment trusts can also hold back some of the dividend income they earn, allowing them to top up dividend payments to shareholders in leaner years — something unit trusts cannot do. This makes them less likely to cut distributions to shareholders, making them a popular choice for investors seeking safe and steady income.
Long track record
The City of London Investment Trust (LSE: CTY) is a great example of how reliable dividends from investment trusts can really be. With 50 consecutive years of dividend increases under its belt, the investment trust boasts one of the longest track records of dividend growth.
City of London invests primarily in UK stocks, with the aim to provide shareholders with long-term growth in both income and capital. It’s a fund that’s mostly invested in the big FTSE 100 companies, with sizeable positions in Royal Dutch Shell (5.9%), British American Tobacco (4.7%), HSBC (4.7%), Diageo (3.3%) and BP (3.1%).
Financial stocks dominate its portfolio, with a 26% sector weighting, and this is followed by consumer goods (20%) and consumer services (12%).
One thing which really sets this investment trust apart from other funds that have multi-decade long track records of dividend growth is its high dividend yield. At present levels, shares in the fund offer a prospective yield of 4.2%. This high yield not only beats the vast majority of equity income investment trusts, but also the weighted average FTSE 100 yield of 3.9%.
On the downside, shares in City of London currently trade at a modest 3% premium to its net asset value (NAV), reflecting strong demand among investors.
For investors looking for even higher yields, Invesco Perpetual Enhanced Income (LSE: IPE) may be worth a closer look.
This trust invests in an internationally diversified portfolio of high yielding corporate and government bonds, and offers prospective investors an impressive dividend yield of 6.4%. It’s not an investment suitable for everyone, but for those with a higher risk tolerance, this trust offers an attractive high yield in what is still a low interest rate environment.
Risk of default
High yield bonds are riskier than investment grade bonds as the risk of default is usually greater. They also exhibit more price volatility, but when the economy is healthy and default rates are low, high yield bonds can pay back much higher returns than their investment grade counterparts.
The recent performance of the trust is solid, with NAV total returns of 55.9% in the five years to the end of December. And following a dividend cut in 2009, the trust has consistently paid 5p in dividends to shareholders in each year.
Despite recent volatility in the bond market, shares in the high yielding trust remain popular as they also currently trade at a 3% premium to its NAV.
Jack Tang has no position in any 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.