Investment trusts usually own portfolios of stocks managed by professional investment managers. Not only does this approach provide diversification, but it’s also a good approach for income investors. 

Trusts have to distribute most of their income to investors with dividends every year. However, they can hold back 25%. Managers can then use this reserve to cover distributions if the income from their investment portfolio falls.

This was particularly useful last year. As companies across the market slashed their payouts, investment trusts dug into reserves to maintain dividends. 

Considering these qualities, there are two income trusts I’d buy for my portfolio today. 

Investment trusts for income

The first company on my list is the Schroder Income Growth Fund (LSE: SCF). With a dividend yield of 4.1%, at the time of writing, the trust offers a market-beating level of income. 

It seeks to invest in companies that can provide a steady stream of income as well as capital growth. The largest holding in its portfolio is pharmaceutical group AstraZeneca. As well as a selection of blue-chips, managers have also acquired several mid-cap stocks including Pets At Home. There are also income and growth stocks such as Burberry.

This approach could be risky because it involves trying to pick growth stocks. Growth stocks are likely to be more volatile than income investments. Therefore, Schroders’ offering may not be suitable for all investors. 

Still, I like the combination of income and the potential for capital growth offered by the trust. That’s why I’d buy the shares for my portfolio today as an income and growth investment. 

International investing

As well as the Schroder, I’d also buy Troy Income & Growth (LSE: TIGT). Some investors might think that just because both of these investment trusts have the words income and growth in the title, they follow the same strategy. That’s not the case. There’s some overlap in the portfolios, but not much. 

The biggest difference is the fact that nearly a fifth of Troy’s portfolio is allocated to US securities. This gives the trust a level of diversification. It also has less exposure to resource stocks, which some investors may be more comfortable with. The Schroder fund’s second-largest holding is Rio Tinto. Troy’s is Unilever. 

That said, some investors may not be comfortable with a trust investing overseas. It also targets growth companies over income investments, so dividend yield is lower than the trust above. Troy’s offering currently supports a dividend yield of 3.6%. 

Despite these risks, I’d buy Troy alongside Schroder in my portfolio for a blend of international and domestic growth as well as income from these two investment trusts.

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Professional buying Next shares 

I’ll look first at the high-yielding investment trust Merchants Trust (LSE: MRCH). Its top holdings are GlaxoSmithKline and British American Tobacco, which each account for over 5% of the trust’s value. 

But I’m more interested in what the manager has been actively doing to navigate this current tricky market. It’s clear they’ve been active. A new position in retailer Next was added. The manager commented:

Whilst current trading is under huge pressure from the lockdown and social distancing, Next has reacted in its characteristically decisive way to protect its financial position and reposition for the future. Although the business cancelled its recent dividend, we would expect Next’s historically strong cash flow to recover, in the medium term, and for ordinary and possibly special dividends to resume.

The trust also added to its positions in National Grid and SSE. The manager cited commitments to dividend policies as well as long-term growth in renewables as reasons to add more. 

Adding to an in-favour pharma share

The management of the Murray Income Investment Trust (LSE: MUT) added to their AstraZeneca holding. Although it has a high price-to-earnings ratio, the pharma company has been growing. It has been involved in finding a vaccine for Covid-19, which has lifted the share price even further. Also for a number of years it has built up an impressive drug pipeline. Its focus on oncology has helped boost the shares.

AstraZeneca has a modest dividend yield because of the share price rise. It is a company with growth potential and potential dividend growth as earnings rise. I’m pleased to have held onto it over recent years. This seems like a very sensible investment, although many investors will be put off by how expensive the shares now appear to be. 

Looking for dividend growth 

Lastly, I’ll turn my attention to Troy Income & Growth Trust (LSE: TIGT). It added to its relatively new holding in FTSE 100 testing company Intertek. The manager made no particular mention of why that position was increased, but based on an interview, it appears the reason for investing originally was to find lower-yielding companies with potential for dividend growth. The manager was also specifically looking for high-quality engineering or industrial companies.

So the key lesson that could be gleaned from these examples is that the professionals are increasingly less concerned about the headline dividend yield. As the manager of Troy points out, the big dividends are too concentrated in a handful of companies – often in commodities. Instead, they will accept a lower yield that can be sustained by earnings growth and as a result are less likely to be cut. I’m inclined to follow their example in the hunt for income.

The post Which income shares have professionals been buying? And should you copy them? appeared first on The Motley Fool UK.

Tough period

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.

The post 2 dirt-cheap investment trusts for dividend-growth investors appeared first on The Motley Fool UK.

This year has been a particularly challenging one for Neil Woodford. He has come under sharp criticism from a range of investors for his lacklustre performance, with several of his funds delivering disappointing performance.

As such, many investors may be wondering if now is the time to look elsewhere for investment trusts to buy for the long term. Could this top-performing trust be worth buying ahead of Neil Woodford-managed funds such as the Woodford Patient Capital Trust (LSE: WPCT)?

A difficult year

Over the last year, the Woodford Patient Capital Trust has underperformed its benchmark, the UK All Companies index, by around 17.3%. In fact, it is down 3.2% on where it was this time last year. As such, it has been a relatively poor year for the trust at a time when a wide range of stocks, funds and indices have enjoyed a major Bull Run.

However, the nature of the trust suggests that over a relatively short-term timeframe it could struggle when compared to its benchmark. It focuses on early-stage and early-growth businesses which may have outstanding intellectual property, but require capital through which to develop. While they may have strong investment potential for the long term, their lack of positive correlation with market indices may mean there are years of significant under and overperformance. As such, a disappointing year for the trust may not be a fair reflection of its potential for long-term investors.

Further criticism

In the last year, the general performance of Neil Woodford-managed funds has not been as strong as many investors have come to expect. For example, he has been criticised for the performance of major holdings within some of his funds, such as AstraZeneca and Provident Financial.

Furthermore, his decision to sell GlaxoSmithKline and British American Tobacco has also caused some investors to become uncertain about his future performance outlook. Both stocks appear to offer sound forecast growth rates, and therefore some investors have been surprised that they have been sold in favour of other shares.

Outperformance

While the Woodford Patient Capital Trust has disappointed of late, the Troy Income & Growth Trust (LSE: TIGT) has surged 30% higher in the last three years. This means it has outperformed the wider UK Equity Income benchmark by around 7%. And with it trading at a small discount to its net asset value, it could offer good value for money for the long term.

With a dividend yield of 3.3%, the Troy Income & Growth Trust offers an inflation-beating income return. It holds a number of large, UK-listed income shares such as Shell and British American Tobacco. Therefore, it could benefit from a further weakening of the pound as Brexit uncertainty builds. It may also be able to offer defensive characteristics due to its geographical diversity on a company level.

Long-term outlook

While the Troy Income & Growth Trust appears to be worth buying, the Woodford Patient Capital Trust could also have investment potential. Neil Woodford has an excellent reputation which has been built up over a long period. He has not suddenly become a worse investor in the last year, but rather has experienced the same disappointment which ultimately inflicts all investors at some point in their investing careers.

As such, the trust and his other funds continue to have investment appeal for the long run. Indeed, with a discount of 5% to its net asset value, the recent poor performance of Woodford Patient Capital Trust could be an opportunity to buy, rather than sell.

The post Should you ditch Neil Woodford and buy this top-performing investment trust? appeared first on The Motley Fool UK.