investments trust for income

d63

as chance would have it there were two articles published today about investment trusts designed to generate income, this one:
https://www.thisismoney.co.uk/money/investing/article-7741519/Want-stream-ready-cash-10-trusts-leave-savings-account-way-behind.html
seems all in favour, but this one:
https://www.moneyobserver.com/news/uk-equity-income-fund-investors-are-dangerous-place-warns-robin-geffen
advises great caution.
sadly i do not understand more than one word in three of either, but i have every confidence that there will be a large number of regular contributors here who could perhaps help advise as to the pros and cons.

A_T

d63 wrote: »

as chance would have it there were two articles published today about investment trusts designed to generate income, this one:
https://www.thisismoney.co.uk/money/investing/article-7741519/Want-stream-ready-cash-10-trusts-leave-savings-account-way-behind.html
seems all in favour,

"If this portfolio had been constructed at the end of October last year – the same time as used in the table above – it would have delivered 12 months of income totalling a shade over £4,461. The capital value of the £100,000 would also have risen by £4,554. Wealth knows of readers who invested £1 million in this portfolio and are currently happy as punch."

Happy they may be but they'd have made more money by simply putting it in a global index tracker.

LobsterMemory

OK, seeing as the one fund I have is Henderson High Income Investment Trust, let's have a look at that

Bought in 2008 @ 93p

Topped up

2009 107
2010 123, 125
2013 167
2014 177, 175. 160
2015 188
2016 176, 184
2018 186


Ignoring that a proportion of those purchases were from reinvesting dividends

Average price 147.5
Current price 180
% gain 22%
IRR Sorry, regrettably, I don't keep those figures

Current yield on historic cost 6.8%
Current yield on current cost 5.5%

So, pros:

Nice regular yield - though they did have to do some fancy accounting about 8 years ago to be able to pay a final dividend one year
Some capital growth

Cons

Let's have a look at their top 10 holdings

GlaxoSmithKline 4.1
Diageo 3.7
Royal Dutch Shell 3.3
BP 2.8
Tesco 2.5
National Grid 2.4
AstraZeneca 2.3
British American Tobacco 2.3
Relx 2.2
HSBC 2.1

Imagine the impact on these if Labour got in, and even if they don't, there are regulation / green issue risks facing the drugs, oil, tobacco, banks and utility companies, even Diageo with unit pricing etc. Tesco faces the challenge of the discounters and I haven't got a clue what Relx is

So that's the dilemma - will the trust continue to receive and pay out good dividends or will they wilt

The choice is yours

MarkCarnage

The UK equity market has a significantly higher dividend yield than almost all other developed markets. There has always been a bit more of a bias to dividends in the UK than some other markets, but the difference now is as marked as I can recall.

This reflects a number of things:

- the composition of the UK index, with a number of large cap stocks in mature or even declining industries, which have historically distributed a relatively high level of net profits

- The relatively depressed performance of the UK equity market in recent years, which has meant that the yield has increased as share prices have stagnated and dividends have increases. Probably a result of a number of factors, including the mature nature of these businesses, Brexit etc etc.

- The non UK proportion of earnings of UK listed large caps is high, and this has in general flattered their £ profitability, and also helped sustain dividend payouts, but this can't go on for ever.

I think to say that 'they' would have made more money by just putting it in a global index tracker may be factually true, but ignores the fact that some investors want the relative certainty of income (even although it may be taxed more heavily).

My approach has been to hold some income ITs within my SIPP, but by no means wholly focused on the UK - I estimate that only 20% of my holdings here are UK on a look through basis. It means that the dividend yield on the portfolio is a bit lower, but probably more sustainable as it's diversified globally and has holdings with greater dividend growth prospects. I do think that the level of income concentration in UK equities is higher than it has even been, and the dividend cover is pretty low even threadbare in some cases.

So some merit in both articles, though I would note that Geffen seems to be talking about UK equity income funds not ITs.

Reaper

MarkCarnage wrote: »

So some merit in both articles, though I would note that Geffen seems to be talking about UK equity income funds not ITs.

Yes they are talking about different types of funds. The second one warns that dividend cover is low at 1.1 ie the major companies are only just making enough profit to pay the dividends and little else. But Investment Trusts (as described in the first article) have an extra layer of cover having held back reserves in the good years to pay out if the companies indulge in a period of dividend cut backs, so they would not need to cut back, at least for a while.

I was more concerned by a reference to the Labour party manifesto which I had missed saying they would reduce the capital gains tax allowance to £1000. That would be a right pain, as would increasing the tax on dividends.

Linton

You should note that the set of income funds given in the first article include a significant % of underlying investments in foreign companies. Some European and SE Asia companies pay reasonable dividends and they provide useful diversification. UK is good for dividends but it's not the only game in town.


Also there is income to be made from bond funds which again provide extra diversification. Other useful areas include infrastructure and private equity funds. There is no need to restrict yourself to ITs. Most of the holdings in my moderately large income portfolio are OEICs/UTs

JohnWinder

I don't yet see the attraction of 'income' funds, compared to any old other equity funds, assuming company profits either go out as dividends (thus income for owners) or are held back increasing the value of the company (thus growth in price for owners). Both together in whatever proportions seems to be total return.

Welcome your advice.

Linton

JohnWinder wrote: »

I don't yet see the attraction of 'income' funds, compared to any old other equity funds, assuming company profits either go out as dividends (thus income for owners) or are held back increasing the value of the company (thus growth in price for owners). Both together in whatever proportions seems to be total return.

Welcome your advice.

Income funds are good for, err, income. They have the advantage that dividends or bond interest are a lot less volatile than capital values. Cutting the dividend is seen as proof that a company has financial problems, and directors dont want to go down that route unless they have no other choice. Also the income from income funds can get paid out automatically into one's current account, no monthly hassle or ongoing thought needed about what to sell when.


These are significant considerations for retirees such as my good self. This doesnt mean that people needing income should not also invest in growth - as always with investing "both" is the best answer to "either/or".

If one doesnt actually need income I dont see any need for them though I guess in their Acc form they could act as a proxy for defensive/value to balance out an excess holding in high risk growth shares.

NedS

JohnWinder wrote: »

I don't yet see the attraction of 'income' funds, compared to any old other equity funds, assuming company profits either go out as dividends (thus income for owners) or are held back increasing the value of the company (thus growth in price for owners). Both together in whatever proportions seems to be total return.

Welcome your advice.

I think maybe there's a psychological consideration when entering the de-accumulation phase.

I think I will find it easier to invest my pot in income generating investments and take the natural yield, which as Linton states may be less volatile (especially when further smoothed by IT's withholding some dividend income for the lean years), knowing I can keep drawing that income regardless of what happens to the value of the underlying capital. Consider that against selling units each month/year to draw an income - how happy am I going to feel selling units in the depths of a market crash.

As I said, it's psychological and the growth strategy is probably going to outperform over a long retirement, especially if drawdown rates are varied to allow for market conditions, but the income route does that for you automatically (if dividends get cut in a market crash) and you don't need to give it any thought.

I was looking at something like CTY (City of London IT) who have raised their dividend for the last 51 or 52 years and have yielded a 5% forward yield on the last purchase I made a year ago plus an 11% capital gain. If I can get a 5% (ish) income yield that (should) rise year on year giving me some protection against inflation, and preserves my capital over the duration of my retirement with some moderate growth to offset the effects of inflation, I think I'd take that deal, especially when you hear of folks talking about 3.5% safe withdraw rates for drawdown strategies.

I view it as analogous to rental income from a BTL - as long as you get the rent each month you don't really think about what the house may be worth, and if it's gone up or down in value - it's just a house that gives you a rental income. Now if you had to sell a few bricks each month to pay the bills, you'd probably be far more interested in the price of bricks.

Thrugelmir

NedS wrote: »

I was looking at something like CTY (City of London IT) who have raised their dividend for the last 51 or 52 years .

On 6 occasions the dividend has only been increased by drawing on capital reserves held.

Dividends are a lot more stable than underlying share prices. Reinvestment of the dividend income is what drives capital growth.

Reaper

NedS wrote: »

I was looking at something like CTY (City of London IT) who have raised their dividend for the last 51 or 52 years

British & American IT (BAF) is an extreme example. It is paying a 24% yield and has increased that every year for the last 24 years. Sounds amazing until you look closer.

The dividends are often paid out of capital. They gambled heavily on a single risky company (Geron Corporation) and the chairman said in the last report "Unless the value of our largest investment, Geron Corporation, recovers further over the coming period towards the levels seen during 2018 we will not be able to maintain our dividend going forward at current levels."

Given all that the 55% premium it is trading at seems mad. I guess people don't look any further than the historic yield.

Despite that warning I am a fan of ITs and hold City of London myself.