These investment vehicles acquire portfolios of stocks or other assets to meet their investment objectives. These objectives can be anything from outperforming the market to beating inflation or generating a specific income level. 

I own several investment trusts in my portfolio, and I am currently looking for other trusts to buy with a focus on income generation. 

Indeed, investment trusts have a unique quality that makes them attractive income investments.

Unlike other investment funds, they can hold back a percentage of revenue in good years. This revenue reserve can then be used in bad years to cover dividend payouts if income from the portfolio is not enough.

This was particularly handy last year when many companies cut their dividends. Investment trusts with revenue reserves were able to maintain their distributions to investors.

As such, here are two companies I would buy to meet this goal.  

Income investment trusts to buy

The first trust on my list is Shires Income (LSE: SHRS). This investment trust owns a blend of different assets, including other investment trusts, fixed income investments and high-yield stocks. 

According to the its latest factsheet, its largest holding at the end of May was the Aberdeen Smaller Companies Income trust. The second and third largest holdings were fixed income investments. These were the Ecclesiastical Insurance 8.875% and Royal & Sun Alliance 7.375% preference shares. The largest single stock holding was an investment in AstraZeneca. 

The mixture of stocks, trusts, and fixed-income investments means the firm offers a higher dividend yield than average. It currently offers a yield of 4.7%. 

The one drawback of this trust is that it has a relatively high ongoing charge of 1.21%. It may also be challenging for some investors to understand due to the complex mix of assets and fixed income securities.

Nevertheless, I like this blend of different assets, and I am attracted to the 4.7% dividend on offer. That’s why I would buy the investment trust today. 

Diverse income

The second income investment trust I would buy today is the Diverse Income Trust (LSE: DIVI).

This company takes a different approach to income investing. It focuses purely on quoted or traded UK stock. Although it can invest in large firms, Diverse tends to concentrate on smaller businesses. The largest holding at present is the financial services firm CMC Markets.  

The exposure to smaller companies could help the trust produce capital growth and income, which suggests it offers something different to Shires, as fixed income investments do not tend to generate capital growth. 

That being said, smaller company stocks can be volatile. So, this investment trust might not be suitable for all investors.

Still, I think the trust offers something different. I am also attracted to its 3.2% dividend yield. 

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This tiny amount of income does not even beat inflation, and with that being the case, I think now could be the time to dump your Cash ISA and invest in investment trusts instead.

The great thing about investment trusts is that they are companies in their own right, and there is no obligation for them to pay out dividends received from their portfolios to shareholders. 

This means trusts can hold some money back in the boom years, to maintain payouts in the lean times. This flexibility has helped some trust achieve dividend track records of as long as five decades.

Record-holder

The City of London (LSE: CTY) has one of the most impressive dividend records of any investment trust. It has been paying and increasing its distribution for 53 years now. 

Managed by Job Curtis, who has been running the fund since 1991, City of London’s portfolio is dominated by high-quality blue-chip stocks. For the 10 years to the end of September 2019, the trust produced a total return for investors of 177.7%, outperforming its benchmark by 45.3%. 

The company owns 97 holdings in its portfolio and charges just 0.39% per annum in fees. That’s nearly half of what Neil Woodford was charging for his flagship Equity Income Fund.

At the time of writing, City of London supports a dividend yield of 4.5% and trades at a slight premium of 3.2% to net asset value.

Multi-manager

Shires Income (LSE: SHRS) is my next income investment trust pick. Unlike City of London, this company invests in other managers as well as fixed income securities and traditional equities. 

The top holding in the portfolio is the Aberdeen Smaller Companies Income Trust, and the next four holdings are all high-yield preference shares. Around 30% of the portfolio is allocated to fixed income. 

This focus on high-yield securities means Shires offers more in the way of income for investors.

At the time of writing, shares in the company offer a dividend yield of 5%. It charges an annual management fee of around 1% with all costs included, and currently trades at a discount to net asset value of 1%.

Emerging income 

The final investment trust that I’m going to profile is the Henderson Far East Income Trust (LSE: HFEL).

With a dividend yield of 6.2% at the time of writing, this trust supports the highest yield in this piece. It is currently trading at a premium to net asset value of 1.5% and charges an annual management fee of 1.1%. 

Launched in May 1930, the goal of the Far East Income trust is to provide shareholders with a growing annual dividend and capital appreciation from a portfolio of investments across the Asia-Pacific region.

Top holdings include Macquarie Korea Infrastructure Ord and China Construction Bank. So, if you are looking to diversify your portfolio away from the risk of Brexit, this company might be the perfect vehicle to do so.

Around a quarter of the portfolio is invested in Chinese stocks, with a further 17% in Australian shares and 13% in Singapore-listed equities. The trust’s performance over the past 10 years has been highly impressive. Including dividends paid to investors, the share price has produced a total return of 127%.

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Equity income funds

Fortunately, there may be a cheaper option. You can invest for dividend income not only by purchasing individual company stocks, but also through investment funds, such as unit trusts, Open-Ended Investment Companies (OEICs) and investment trusts.

These funds invest in dividend-paying companies, with the intent of delivering regular income for their investors, paid out of the dividend income which they receive from their underlying investments. When it comes to diversification, equity income funds have therefore become popular with dividend investors looking for a low cost method of spreading the risk.

That is the case with The Merchants Trust (LSE: MRCH). With a low ongoing charge of just 0.59%, it seeks to provide investors an above average level of income, as well as income growth and long-term growth of capital via investments in domestically-listed dividend stocks.

Large-cap companies

Simon Gergel, who has been managing the trust since 2006, has a preference towards large, well-established and well-known UK companies. In terms of recent portfolio activity, he added two new holdings to the portfolio — shopping centre real estate company Hammerson and wealth manager St James’s Place.

Altogether, there were 49 stock positions in the portfolio at the end of March 2018, with the largest holdings being Royal Dutch Shell (7.0%), GlaxoSmithKline (6.5%), BP (4.8%), UBM (4.3%) and HSBC Holdings (4.2%). The financial sector is its largest sector exposure, with a 31% weighting, and this is followed by industrials (16%) and consumer services (15%).

The Merchants Trust has an impressive track record for growing shareholder payouts, after having increased its dividend payouts to shareholders over the past 36 consecutive years. It currently has a yield of 4.8% and trades on a small discount to net asset value (NAV) of 3.4%.

Attractive yield

Shires Income (LSE: SHRS) is another equity income fund which offers an attractive yield. Shares in the investment trust currently offer a yield of 4.5% as they trade at a slight premium to its NAV of 1%.

But unlike the Merchants Trust, which invests primarily in equities, this fund seeks to provide shareholders with a high level of income by also investing in preference shares, convertibles and fixed income securities.

Diversification

This multi-asset approach divides the money invested between the various asset classes, adding to its diversification, which can help to reduce risk. On the downside however, the fund is also more exposed to the risk of rising interest rates, which could be a concern for investors.

Also, unlike the Merchants Trust, Shires Income also gets exposure to smaller companies via an investment in its sister small-cap equity income fund Aberdeen Smaller Companies Income, which accounts for 8.9% of its assets. Sector-wise, financials (again) dominate the Shires Income portfolio, accounting for 52% of total assets, and this is followed by consumer goods (11%) and industrials (10.4%).

Fees for the fund are a bit higher than the Merchants Trust, with an ongoing charges figure of 1.04% for the past year.

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Income on offer 

The goal of the Shires Income (LSE: SHRS) trust is to “provide for shareholders a high level of income, together with growth of both income and capital,” which management has been able to accomplish over the past five years. Indeed, over the previous five years, the net asset value of the trust has grown by 77.8%, compared to the UK Equity Income benchmark return of 68%. 

However, Shire’s share price has not kept up with NAV growth. The trust’s shares have returned just 59.5% over the past five years. The good thing is that this sluggish performance now means that investors can buy into the trust at an 18.7% discount to NAV and pocket an annual dividend yield of 4.92%. 

The annual management fee is 1.04%, and the fund owns a collection of top dividend stocks as well as a top 10 holding in the Aberdeen Smaller Companies Income fund, giving investors exposure to small company growth as well as large-cap income. 

International exposure 

Many investors balk at the idea of investing overseas, but you can often find desirable investment opportunities in global markets. The Aberdeen Latin American Income Trust (LSE: ALAI) is a great example. 

This is a fixed income and equity trust, with assets split roughly 50/50 across Latin American bonds and equities. Unfortunately, over the past few years, as Brazil has struggled with political and economic instability, the trust’s returns have suffered. NAV has only expanded 11.7% over the previous five years. Still, this return is more than double that of its benchmark, which gained only 4.9% over the same period. 

After this poor performance, the shares trade at a discount of 13.6% to published NAV, offering a deeply discounted play on Latin America’s economic recovery. As well as the discount, shares in the trust also support a market-beating dividend yield of 4.5%. Management fees are a relatively high 2.01%. 

Water water everywhere 

Water is the world’s most valuable resource, and as the world’s population continues to expand, demand for this commodity is only going to grow. 

The Premier Energy & Water Trust (LSE: PEW) is well placed to profit from this trend. The company’s target is to invest the majority of its assets in water and other infrastructure assets to produce a desirable level of capital growth and income for investors. Assets are currently invested in companies around the world active in the water and energy sector with a focus on renewable markets, although UK utility giant SSE also features in the top 10 holdings. 

Over the past five years, the focus on water and infrastructure has helped the fund produce a return for investors of 140%, outperforming its benchmark by 73%. Today, the trust’s shares are trading at a discount to NAV of 6.7% and support a dividend yield of just under 6%.

I believe this could be one of the best value trust out there thanks to its high returns over the past few years, current dividend yield, and discount to NAV. 

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