Green is good

The first one is Greencoat UK Wind (LSE:UKW). The investment trust went public in 2013 and started paying out income from the start. It typically pays a dividend each quarter, with the current yield at 7.69%.

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The business is focused around investing in renewable energy assets (hence the reference to wind in the name). It makes money in several ways, including selling the energy generated by the offshore wind farms. The trust is also involved with the UK government in different projects and subsidies that provide income.

Given the steady nature of operations, the historical income payments have been not only consistent, but growing. The dividend cover is 1.5 times earnings, meaning that it can be comfortably paid without putting pressure on the finances.

The stock is down 2% over the past year. One risk of investing is that the net asset value (NAV) of the portfolio isn’t really increasing. Given that the NAV should reflect the share price, the stagnation isn’t great.

Slow and steady isn’t a bad thing

A second idea that has been paying out reliable income is the Lowland Investment Company (LSE:LWI). The trust, run by Janus Henderson investment management, primarily buys UK stocks. It targets all sizes, from small-cap through to large FTSE 100 names.

The aim is both income and growth. The stock is up 12% over the past year, so clearly it gets a tick in that box. But from a dividend perspective, it’s also doing well. The current yield is 4.73%, well above the FTSE 100 and FTSE 250 averages. It has constantly paid out a dividend for over a decade and now pays out cash each quarter.

Some will say that investing in mostly UK stocks limits the potential for the fund to grow. Further, it could give me a concentration risk by simply adding more UK stocks to my existing UK portfolio. However, Lowland has around 120 holdings at any one time. So buying the stock gives me an easy way to access a lot of different companies, which actually helps to diversify my risk.

Given the spread of sectors and firms, I see the future income stream as safe. If a couple of the 120 stocks stop paying dividends, it’s not going to materially impact my yield.

I like both ideas and am thinking about adding them to my portfolio.

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While I prefer to pick my own dividend income stocks, investment trusts can do a brilliant job, too. The very best aim to pay a steadily rising income by retaining some dividends in the good years and using them to top up returns when businesses are cutting shareholder payouts.

JP Morgan Claverhouse Investment Trust (LSE: JCH), launched in 1963, has increased its annual payout for an incredible 50 consecutive years, making it a true Dividend Aristocrat. It has done this by investing in a pool of UK equity income stocks. The trust’s top 10 holdings include familiar names such as Shell, HSBC, AstraZeneca, BP, and Glencore.

Consistent income growth

Currently, it yields an attractive 5.32% a year. That’s comfortably above the FTSE 100 average, which is closer to 3.8%. While dividend income is never guaranteed, Claverhouse is one of the safest ways of getting access to the rising passive income stream they offer.

Its share price total return isn’t as impressive as I’d like. As my table shows, the £383m fund has struggled to beat its benchmark, the Association of Investment Companies UK Equity Income Sector. Its 10-year return is impressive though.

Claverhouse is currently trading at a discount of 5.51% to the value of its underlying assets. That reflects a tough year for UK shares. Now could be a good time to buy before interest rates peak and UK shares recover. Its ongoing charge is 0.7% a year.

The Lowland Investment Company (LSE: LWI) also offers investors a combination of growth and income from stocks mostly listed on the FTSE All-Share, and currently yields marginally more at 5.42%.

Aim high, buy Lowland

Managed by Janus Henderson, Lowland also features Shell, BP, and HSBC among its top 10 holdings. It also invest in small and medium-sized companies, with big positions in companies I don’t know much about, such as FBD, Irish Continental Group, and Serica Energy. Its long-term total return has been surprisingly low at just 26% over 10 years, which leaves it well below its benchmark. Yet the last three years were more impressive.

Lowland, also launched in 1963, has increased its dividend every year for the last 13 years, so it’s not at Claverhouse levels yet. What really tempts me is that the £398m fund trades at a wide discount of 12.6% to its underlying net assets. The ongoing charge is 0.6% a year.

If I split a £20,000 Stocks and Shares ISA allowance between these two investment trusts, I would get a yield of 5.37% a year. That will give me £1,074 a year. Better still, history suggests that will rise steadily over time.

Investors who want a manager to pick stocks on their behalf could do a lot worse than buying these two investment trusts. Personally, I’d hope to do better with a concentrated portfolio of around a dozen dividend income stocks I bought myself.

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An excellent investment trust

The Lowland Investment Company (LSE: LWI), should fit the bill as a share poised to benefit from the appetite for value-focused investments as inflation persists. Top holdings include big UK shares such as Shell, GlaxoSmithKline, Phoenix Group, HSBC and BP.

Shell’s share price has risen by 18% this year, and commodities could continue to do well in an inflationary environment. The flipside of this is that the trust is very UK-focused so if investors continue to avoid the UK, as many institutional big-hitters do, then that may impact the trust’s performance. Its big exposure to financials such as banks and to oil & gas could be an issue too, as both of these industries are cyclical.

Coupled with net gearing of 15%, which could amplify losses if the trust invests in the wrong companies, this one isn’t without risks.

However, the shares trade on a discount of around 6% (although the discount has been larger in recent times). As well as that, shares in the trust yield 4.46%, which I think has appeal from an income perspective. Charges of 0.59% also compare favourably to other trusts, so I’m thinking of buying shares in it to get diversified exposure to UK value shares. 

Better than SMT?

The Schroder Income Growth Fund (LSE: SCF) is another higher-yielding UK-focused pick. The yield is about 4.1%, so that’s good versus most other stock market investments and compared to interest rates as they currently stand. The trust’s top holdings are AstraZeneca, GlaxoSmithKline, Anglo American and Shell.

The immediately obvious downside to this one is that it trades on a premium of about 1% to its net asset value. On top of that, it’s slightly more expensive with a charge of 0.79%. Its consistent record of dividend growth potentially makes that a price worth paying, especially if its underlying holdings do well and push up the net asset value of the trust.

The bottom line is these trusts are quite similar in many ways so I wouldn’t buy both – even though the two of them could well outperform Scottish Mortgage Investment Trust this year and maybe also over the longer term also. It’s a close call between them but Lowland looks to have the slight edge for me based on its lower charges and the fact it trades on a discount.

To recap I think inflation will drive the share prices of these value-focused investments. That’s why I’m keen to add a value investment trust to my portfolio. 

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There’s no way I could do all of the research needed to build both of these portfolios. By enlisting expert help, I can get exposure to areas that would otherwise be out of my reach.

Scottish Mortgage Investment Trust: growth experts

The Scottish Mortgage Investment Trust (LSE: SMT) specialises in finding growth businesses with the potential to disrupt markets. Big successes in recent years have included Tesla, Amazon, Chinese e-commerce giant Tencent and Covid-19 vaccine producer Moderna — the pharma firm was SMT’s second-largest position at the end of June.

Scottish Mortgage’s distinctive long-term approach has delivered impressive results over the years. The trust’s stock has risen by 50% over the last year and by 335% over the last five years.

SMT’s success means it’s now a FTSE 100 company with about £20bn of assets under management. I can see some risk that the group’s large size could make it harder to maintain rapid growth. However, I don’t see this as a big worry at this time.

In my view, a bigger concern is that the trust’s long-running manager, James Anderson, is about to retire. Since first managing the trust in 2000, its share price has risen 1,350%. Although the trust’s new managers have worked at SMT for years and are committed to the same strategy, I see this handover as a potential risk.

Would I buy shares in Scottish Mortgage Investment Trust today? Yes. SMT provides shareholders with exposure to many of the world’s best tech and healthcare growth stocks. The trust also has a record of identifying many future big winners.

So I’d be happy to buy SMT as a long-term investment — preferably holding for at least 10 years.

Market-beating income

The second investment trust I’m going to look at is a little smaller. Lowland Investment Company (LSE: LWI) operates in a sector of the market where I’ve much more knowledge — UK dividend shares.

The trust’s remit is to provide market-beating income and growth, with an emphasis on income. Lowland’s share price has risen by nearly 50% over the last year, outperforming the FTSE 100’s 16% gain.

I wouldn’t expect this kind of performance in more normal times — over the last five years, Lowland’s lead over the FTSE 100 has been much smaller. However, the big attraction of this trust for me is the trust’s dividend record. Lowland hasn’t cut its dividend for 30 years and currently offers a 4.2% dividend yield.

By contrast, the dividend yield on the FTSE 100 is currently just 3.1% and many FTSE shares did cut their dividends last year.

One risk I can see is that around 30% of Lowland’s portfolio is currently invested in financial stocks, such as insurers Direct Line and Phoenix. Financials are doing quite well at the moment and offer some high yields. But this may not always be true — heavy exposure to one sector can be a problem when market conditions change.

Despite this risk, Lowland’s long dividend record suggests to me the trust’s management have good processes in place for managing risk. This is an investment trust I’d buy for income today.

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Using a share screening tool I’ve identified a UK share that I think fits the bill. It’s defence contractor Ultra Electronics (LSE: ULE).

Strong share for passive income

In my opinion, Ultra Electronics is a great share for passive income. Dividend growth has been steady for the past decade or so, with continual incremental increases. I prefer this in many ways to big jumps that can’t be maintained. Small increases in the dividend have helped dividend cover rise as earnings have improved.

A forward dividend yield of 2.76% is also not to be sniffed at, although it’s probably at the lower end of what I’d want to see in a passive income share.

Increasing my optimism is the fact the business displays signs of being both profitable and sustainable. these are good traits in my view for a passive income share. Margins and returns on capital are both quite adequate and rising rather than falling.

Also, cash flow appears to be very strong. For example, in 2020, operating cash flow per share rose to 183p from 133p. That shows the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term capital investment. It’s a positive metric.

There are risks, of course. As with any share, the share price could fall. There are a number of reasons specific to Ultra Electronics why this could happen. Fears around defence budgets being cut to pay for a post-Covid recovery could be a big one. Losing contracts could be another. The industry is also very competitive, putting pressure on margins. 

It’s also more expensive than a competitor like BAE Systems. On the other hand, Ultra seems to have more quality attributes, making it better for passive income, in my opinion.

Another option for income seekers

That may be top of my list, but there are others I like too. The investment trust Lowland Investment (LSE: LWI) was another of the few shares to meet the criteria.

It’s higher yielding than Ultra with a dividend yield of 4.4%. Its shares also trade at a discount to their net asset value. The discount is about 3.5%, although this is less than the 12-month average discount. So they have got a bit more expensive.

According to the Association of Investment Companies (AIC), Lowland investment trust has increased its dividend for 11 consecutive years. That’s not a bad record and is reassuring for me as I look for passive income from UK shares.

The trust invests in UK shares. Top holdings include well known higher yielding companies such as GlaxoSmithKline, Royal Dutch Shell and HSBC. It also mixes those with some smaller UK companies such as K3 Capital and Ilika.

The risk is the discount could widen or that the trust’s reserves are so badly hit by the pandemic that the dividend can’t be increased further. 

Overall though, I think both Ultra Electronics and Lowland are strong UK shares that I might well consider adding to my portfolio to create sustainable passive income.  

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Freetrade has identified three that seek out undervalued companies across the indexes, and I’m taking a look.

A contrarian investment trust

Fidelity Special Values (LSE: FSV) suffered a painful share price crunch in the first weeks of the pandemic. It quickly lost more than 50% of its start-of-year value, way worse than the FTSE indexes. It’s been muddling along since then, until the November spike came along. So far in the month, the price has soared 36%. But it is still down 15% year-to-date.

Net asset value per share (NAV) is estimated at 229p. So with the shares currently at 236p, we’re looking at a premium of 3%. It does look like the super-cheap opportunity has gone, but I’m still tempted to buy.

Fidelity describes itself as a “contrarian investment trust that thrives on volatility and uncertainty.” Sounds perfect for 2020. But what shares does it hold? Insurer Aviva is among FSV’s top stocks, and I rate that a top contrarian pick right now. Halfords is there too, another I see as undervalued.

Smaller companies

Freetrade’s next pick is Aberforth Smaller Companies (LSE: ASL). Small companies can be easily overlooked when investors are seeking the relative safety of blue-chip stocks. And those are what Aberforth looks for here.

Again, we see a November uptick, with the investment trust up 38%. The share price is down 22% so far in 2020, so maybe there’s more gain to come?

NAV stands at an estimated 1,229p, with the shares at 1,194p, at the time of writing. So we could pick up Aberforth Smaller Companies at a discount of 2.8%. Smaller stocks are likely to be more volatile though (but we’re talking 2020 here, so I guess anything goes).

I invested a lot in small-cap stocks in my earlier years, seeking growth rather than income. I see many as overlooked and undervalued now, and I think they’re likely to continue their recovery. Perhaps with some more ups and downs on the way.

Wide index spread

The last of the three is Lowland Investment Company (LSE: LWI), which has an interesting approach to sectors. This investment trust puts around half its cash into FTSE 100 companies. The rest goes into companies its managers think are undervalued, picked from across the smaller indexes.

I like the idea of mixing blue-chip stability with a bit of smaller-cap potential. So this one definitely appeals to me. And looking at top index holdings, I see Tesco and GlaxoSmithKline there. Those are both companies I’m bullish about for the long term.

The November spike struck here too. The Lowland share price has climbed 32% in November. But even so, the shares are still down 18% year-to-date. The current estimated NAV stands at 1,180p, with the shares on exactly the same price, as I write. So, in this case, there’s no discount or premium. But either way, I’m putting Lowland Investment on my list of investment trusts to examine more closely.

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With this being the case, I think it’s best to leave the challenge of picking dividend stocks to the professionals. So today, I’m looking at my two favourite income investment trusts for 2019.

Income and growth

My first pick is the Lowland Investment Co (LSE: LWI). Managed by James Henderson and Laura Foll, this investment trust tries to pick equities across the spectrum. The managers (who have several decades of experience picking stocks between them) like small and mid-cap stocks for their growth potential, but also like large-cap stocks that produce a steady level of income.

Over the years this has proven to be a potent combination. The trust currently supports a dividend yield of 4.1% and over the past five years has churned out steady capital gains averaging around 2% per annum, although, like the rest of the market, the share price has suffered significantly in recent months. Over the past 12 months, the Lowland share price is down 11%, slightly more than its benchmark loss of 8.7%.

Still, I think in the long term this company should prove to be a winner particularly when you include reinvested dividends. At the time of writing, the shares are trading at a discount of around 0.6% to the net asset value (the five-year average is 2.9%), and the annual management charge is 0.57%, which is relatively modest.

If you are looking for income, it is worth keeping an eye on this trust in my opinion.

Overseas income

Lowland is a UK-focused investment trust, so its performance is tied to that of UK markets. In comparison, the Schroder Oriental Income Fund (LSE: SOI) can hunt for income around the world. 

According to the fund’s latest update, around 16% of its assets are invested in Hong Kong, 13% in China, 13% in Australia 11% in South Korea and the rest across other regions around the world. Only 6.2% of the fund’s net asset value is invested in UK equities.

Schroder Oriental was first launched in 2005, and since then it has proven itself as an income play. At the time of writing, shares in the trust support a dividend yield of 4.2%. Over the past 10 years, every £10,000 invested has grown into £39,000 with dividends reinvested, a compound annual return of 16.3% per annum for investors.

While past performance is no guide to the future, I think this trust can continue to produce at least mid-single-digit per annum returns for investors after including dividends for the foreseeable future. Economic growth across Asia is showing no signs of slowing down, and for UK investors, Schroder Oriental offers great diversification away from the uncertainty of Brexit.

Right now the firm is trading at a small premium to net asset value of 2.2% compared to the 12-month average of 0.1%. The ongoing annual management charge is 0.84% per annum, which I think is relatively modest considering the level of returns the trust has produced over the past decade.

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First step

I reckon the first step to successful investing is figuring out your objectives and risk tolerance. You need to define your goals and objectives before you are able to make good decisions on which investments to choose. What you’re investing for, the risks you’re willing to take and your investment horizon can all affect how much you’ll need and which options you should pick.

If you’re just starting out, you’ll probably want to consider investment trusts first. Shares in such trusts are traded just like other shares. But as a fund, investment trusts offer the advantages of being run by a professional fund manager and diversification from buying into a well-balanced portfolio of investments.

Growth and income

If you’re looking for a combination of growth and income, then the Lowland Investment Company (LSE: LWI) might be a great first pick.

This fund invests in a broad spread of predominantly UK companies, with the aim of giving shareholders a higher than average return with growth of both capital and income over the medium-to-long term.

With 121 holdings as at 31 December, the fund invests in a diversified portfolio of companies of differing sizes. Normally, not more than half of its portfolio by value is made up of the largest 100 UK companies, with the balance invested in small- and medium-sized firms.

Outperformance

The fund has a strong track record of outperforming the benchmark FTSE All-Share Index. For the five years to the end of December, the net asset value (NAV) of the trust increased by 79%, easily beating the performance of the FTSE All-Share index, which generated a return of 63% over the same period.

At the time of writing, shares in the trust offer investors an attractive dividend yield of 3.5% and it trades at a slight discount to its net asset value of 6%.

Global diversification

Investors seeking geographical diversification may instead consider the Murray International Trust (LSE: MYI)

Launched in 1907, this fund has invested in a well-balanced portfolio of UK and international shares, with the aim of delivering both growth and income to shareholders. Its investment approach is to seek undervalued, but quality, companies that have a solid business focus, sound management, a strong balance sheet and a good corporate governance record.

Fixed income investments

Equities dominate its portfolio, with an 83% weighting, but the trust also owns a number of fixed income investments, which account for a further 16% of its portfolio. This gives the Murray International Trust even more diversification than some simple equity funds, since the price of bonds generally do not move in tandem with the stock market.

The fund’s top five equity holdings are: Taiwan Semiconductor Manufacturing (4.8%), Quimica Y Minera (4.3%), Groupo Asur (4.2%), British American Tobacco (3.8%) and Unilever Indonesia (3.4%).

This fund could also appeal to income seekers, as shares in the trust currently offer a yield of 4.2%.

The post Looking for your first investment? Consider these growth and income trusts appeared first on The Motley Fool UK.

Still, a number of similar problems have faced the global economy in recent years. Yet share prices in the UK and across the world have risen significantly. Looking ahead, a continuation of the Bull Run of recent years could be on the cards. As such, buying these two top-performing investment trusts could be a shrewd move.

Global appeal

Investing globally has served the Scottish Mortgage Investment Trust (LSE: SMT) well in the last five years. It has delivered a total return of 217%, while its benchmark has risen by 99%. Outperformance has been present in each of the last five years, which shows that the company’s management team has a strong track record of consistently high performance.

One major reason for the outperformance has been the company’s focus on the US. It has 47% of its holdings in US-listed companies, and with the S&P 500 having moved 70% higher during the period, it has provided a sizeable tailwind.

Looking ahead, more gains could be due for the S&P 500. Donald Trump is still aiming to put in place significant increases in spending as well as lower taxes during his time in office. This could create further stimulus for the economy and lead to higher profitability for companies operating in the country. Although the Scottish Mortgage Investment Trust trades at a small premium to its net asset value of 0.65%, it could prove to be a sound buy for the long term.

UK focus

Of course, the UK stock market has also performed relatively well in the last five years. The FTSE 100 is up by 22% during the period, with it benefitting from a weak pound in the last year. This has helped UK-focused companies such as the Lowland Investment Company (LSE: LWI) to post strong returns. It has recorded a total return of 75% during the last five years, which is well ahead of the main index.

The trust’s future appears to be bright. The pound could weaken yet further if uncertainty surrounding Brexit continues to build. Certainly, there is scope for an interest rate rise in the near term. But even so, a loose monetary policy looks set to stay as the Bank of England remains concerned about the potential for economic growth.

This could provide investment opportunities across a range of stocks and could mean that the Lowland Investment Company continues to perform well. Trading on a discount of 8% to its net asset value, now could be the right time to buy it.

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