Very much an amateur economist, Roth recorded many of the predictions that were variously made during those years – and fascinatingly, subsequently went back to them as the years passed, to record how they worked out. Reading it over the weekend, I spotted one such update dating from 1962, two decades after the diary closed.

Long-term returns

Coincidentally, I’d picked up Roth’s diary to re-read just after finishing John Newlands’ excellent short history of the Dunedin Income Growth Trust (LSE: DIG), covering the years from its launch in 1873 up to 2018.
 
Newlands, for readers who don’t recognise the name, is something of a historian of the investment trust industry, and the author of the classic text on the subject.
 
Dunedin, he relates, was founded by Robert Fleming – yes, that Robert Fleming, of lauded investment banking firm Robert Fleming & Co – very early on in his stockbroking and banking career. Inspired by the launch of the Foreign & Colonial Investment Trust (one of the world’s very first investment trusts) in 1868, he decided to emulate it, but invest in shares rather than government bonds.
 
And both Roth’s diary and Newlands’ history of Dunedin, I realised, made exactly the same point: the future is unknowable, and predictions about it are often wrong.
 
The best defence against that uncertain future: invest conservatively, invest with an eye for bankable income, and – above all – diversify.

Diversified holdings

Granted, Fleming and his various successors over the years might not recognise some of Dunedin’s largest holdings today: AstraZeneca, GlaxoSmithKline, Diageo, BHP Group, Rio Tinto, Weir Group, National Grid and so on.
 
But they would surely understand the selection principles at work, and which are at work in the many other income-seeking investment trusts that have followed in Dunedin’s wake, sometimes decades later.
 
Murray Investment Trust (founded in 1923), City of London Investment Trust (1891), The Merchants Trust (1889), Lowland Investment Company (1963) – all hold diversified portfolios of large, high-quality, higher-yielding FTSE 100 companies.
 
It’s a policy that has served them well, as you can see. Because if you’re still successfully serving investors’ needs after 100–150 years, you must be doing something right.

Income at a price

And it’s fair to say that here at The Motley Fool we’re fans of investment trusts. I hold a few myself.
 
But equally, we’re aware of their limitations.

For one, they come at a price: although generally cheaper than open-ended investment funds, their managers levy an annual charge on investors, generally in the range of half a percent to one percent of the trust’s value.
 
That may not sound much. But if a trust is yielding – say – 5% after charges, such a fee means that investors’ income would have been 10–20% higher, if they had held the trust’s underlying investments directly, rather than through the trust.

Diluted returns

Yet investment trusts have another, more fundamental, weakness. Because diversification has a downside: risks are spread, but so are returns.
 
The popular City of London Investment Trust, for instance, has 86 holdings. As of its latest quarterly update, only one of these holdings – British American Tobacco – made up more than 4% of the portfolio. Most of the trust’s top ten holdings are of the order of 2.5–3.0%.
 
Put another way, a trust that is so diversified is never going to shoot the lights out from a capital gains point of view. It’s simply too diverse. Income will be resilient and reliable, to be sure. But growth is going to fairly closely track the Footsie as a whole, albeit the higher-yielding part of the Footsie.

And put another way still, once you’ve factored in the typical trust’s charges, it may be better to simply buy a cheap index tracker, where charges are on the order of one-tenth of the typical trust.

Focus finds favour

As ever, legendary investor Warren Buffett sums it up best.
 
“Keep all your eggs in one basket, but watch that basket closely,” he wrote.
 
It certainly hasn’t harmed Buffett’s returns.

The post Diversification’s downside: resilience has a price appeared first on The Motley Fool UK.

Investing in the UK’s biggest and best

Merchants Trust (LSE: MRCH) aims to provide an above-average level of income, plus income growth and long-term growth of capital by investing mainly in higher-yielding large UK companies. The portfolio holds a host of high-profile companies such as Royal Dutch Shell, GlaxoSmithKline and Barclays. About two-thirds of the trust is invested in the FTSE 100 with a further 25% in the FTSE 250. The rest is divided between small-caps and cash.

The dividend is paid quarterly, which is good if you want to create a passive income ahead of retirement. It means you can invest in more shares or take the cash as income, although the former will help you build a shares portfolio far more quickly, especially if you have no savings. The yield has been pushed down by recent strong share price growth, but still provides over 4%, which is more or less in line with the FTSE 100.

A slow and steady, year-on-year increase in the dividend gives me confidence that it’s ideally placed to generate a passive income to help you retire richer.

That, alongside the ability of investment trusts to hold reserves to see investors through any leaner years, makes them potentially very financially rewarding and probably the cornerstone of a good investment portfolio. This is why I also like the look of this second investment trust. 

Another above-average yielder

Dunedin Income Growth Investment Trust (LSE: DIG) is another one that is yielding over 4%. It also holds a number of the same higher-yielding companies as Merchants Trust, but it has different top holdings, such as Assura, RELX and Diageo. 

Besides the yield, one of the big perks of this investment trust is that it trades at a discount to what it’s actually worth. Good for investors who want to buy up the shares. The discount is 7%, which is only a little less than the 12-month historical average discount that has been nearer 8%. Again, a rise in the share price following the market bounce post-election has contributed to the narrowing of the discount.

Cumulatively over the three years to 30 November 2019, the shares rose by a third and the dividend has been rising year-on-year and is paid quarterly.

Overall I think these investment trusts are ideal for someone approaching the end of their working life who wants to retire better off. They provide diversified access to a large number of larger companies and a generous dividend yield that is often more than the average for the FTSE 100. 

The post No savings at 60? I’d buy these 2 investment trusts to generate passive income appeared first on The Motley Fool UK.

As such, buying investment trusts which offer a high dividend yield could be a shrewd move. Here are two trusts that could beat inflation – even if it continues to move higher over the medium term.

Growth potential

The two investment trusts in question are Dunedin Income Growth (LSE: DIG) and the Murray Income Trust (LSE: MUT). They have dividend yields of 4.5% and 4.1% respectively. This means they are at least 150 basis points ahead of inflation at the present time. Even if the rate of growth of prices increases above 3%, they are very likely to deliver a real income return for their investors.

In addition, they both trade at a discount to their net asset values (NAVs). Dunedin Income Growth has a discount of 9%, while the Murray Income trust’s discount is around 7%. These figures suggest they may offer good value for money, with their share price growth of 9% and 6% respectively during the last six months showing they are able to perform relatively well versus their benchmarks.

Income outlook

Both trusts could help investors to counter the threat of inflation, not only through their current dividend yields, but also because of the companies they are invested in. While they generally hold UK-listed shares, the companies they own shares in have significant international operations. This may enable them to benefit from higher growth rates outside of the UK economy, as well as a weaker pound.

If sterling depreciates further then it would be unsurprising for both trusts to deliver improved share price performance. Dividends and share price valuations within the fund could gain a boost from currency fluctuations and this may lead to improved total returns for investors. And with international diversity comes a lower risk profile. This may help investors to overcome the potential risks from Brexit over the medium term.

Possible risks

Looking ahead, investment trusts focused on income could see their valuations come under pressure from a rising interest rate. If inflation continues to be relatively high then the Bank of England may seek to tighten monetary policy to some degree in order to cool-off rising prices. In such a scenario, other asset classes such as bonds may become relatively more attractive for income investors.

However, with the UK economy continuing to face an uncertain outlook, the prospect of a sustained interest rate rise seems unlikely. With diverse holdings, discounts to their NAVs and above-inflation income yields, Dunedin Income Growth and the Murray Income Trust seem to be worthwhile buys for the long term.

The post 2 dirt-cheap dividend investment trusts yielding more than inflation appeared first on The Motley Fool UK.