Investment Trusts / REITS for retirement income.

AsifM068

Evening all,

I've been scoping out both Investment Trusts such as City and London  and UK REITS as a source of passive dividend income for when I retire in about seven years time.

I am hoping to achieve a dividend yield of around 5% with some capital growth with funds to be held in an ISA.

The bulk of my savings are invested in a global index tracker through Vanguard under an ISA at present.

Any thoughts or pitfalls that I should consider?

Many Thanks

tebbins

Some more information including:
- your age, are you married/a civil partner, any children you want to leave an inheritance for?

- will you have a full state pension
- your financial situation now including amounts saved, how much is left on your mortgage and at what rate?
- What is your pension provision situation, do you have a SIPP, any defined contribution or defined benefit pensions from any previous employers?
- What provision have you made for potential care expenses?

I have two thoughts on your post.

1. Before you even think about which funds, if this is for retirement this money should be in a pension tax wrapper first.

2. Think in terms of withdrawing from the total return, capital + income. Chasing a high dividend yield can be a riskier strategy and perform worse than a more balanced portfolio or a "normal" index fund. If Vanguard global tracker funds are good enough for you to accumulate wealth, why would switch to something completely different when you retire? Everyone's portfolio changes as they transition into retirement because you're relying on the money more. Dividend yields are currently very low, so 5% is a big ask that requires a portfolio very different, perhaps in riskier companies or high yield bonds.

ColdIron

AsifM068 said:

I am hoping to achieve a dividend yield of around 5% with some capital growth with funds to be held in an ISA.

Any thoughts or pitfalls that I should consider?

A yield of 5% is quite achievable but you might want to manage your expectations regarding growth. Even the venerable CTY has fallen over 5 years. Be aware that many performance charts etc that you see will assume dividends reinvested (unless the Y axis declares price, not percentage)

I would be careful when choosing your REITS, property can and often does do unexpected things and many have short histories. Personally I wouldn't go higher than 10% and I would sleep better with less

Cast a wider net than UK equities. In the equity space perhaps look at the far east (HEFL?). Global (MYI or HINT?). With dividends it's easy to become too UK focussed, HINT is useful in that it excludes the UK

Don't overlook non equities. Perhaps a small amount of higher yielding bonds (HDIV?) or infrastructure (HICL?). Same warnings apply to all of these regarding growth

These are not recommendations, just suggestions to start your investigations

Moe_The_Bartender

Some REITs are very pricey at the moment. I just sold BBOX and SGRO which are are premiums in excess of 20% which seems over the top even for big box trusts. I'm rather wary of the sector but still like the look of healthcare REITs like PHP.

If you don’t want to choose individual REITs yourself, a fund like VT Gravis UK Listed Property is worth a look.

You could cast your net a little wider and look at Jupiter Monthly Alternative Income or VT RM Alternative Income which invest in other non-equity income such as debt, contract and royalties as well as REITs.

maxsteam

If you are willing to invest in tobacco, a long standing ethical concern for many, and coal mining, a more recent concern, you should be able to achieve 5%. City of London Investment Trust has always been, and will probably always be, a major shareholder in tobacco firms. You may or may not be happy with this but you should be aware of it. BAT's yield is 8% and Imperial's yield is 10% so these two may be a significant part of other high-yielding funds. The top ten holdings of any fund are widely published with other fundamental data.

Property is, in my view, an uncertain area at the moment.

High yielding shares tend to be shares that are out of fashion for one reason or another. There's no reason why you should not proceed as planned, but I thought I'd post my thoughts. There are pros and cons to weigh up with any plan.

If you will not be retiring for seven years, why not seek growth until retirement?

Albermarle

The bulk of my savings are invested in a global index tracker through Vanguard under an ISA at present.

With seven years to retirement , you might want to consider derisking your investments . Global equity markets have had a good run for the last ten years and all good things come to an end one day and a 100% equity tracker could get hit hard if/when that happens. 

On the other hand if you have a lot of cash savings and/or a good final salary pension lined up as well , then desrisking your ISA might not be needed.

AsifM068

Thank you all for your advice, it is very much appreciated.

All options are still on the table and as referred to I have around 7 years (I will be 53 in October '21) before retirement when my Civil Service Defined Benefit Pension (worth 10K p/a plus a 26K lump sum payment) kicks in.

I have invested 160K at the moment with Vanguard's FTSE Global All Cap index tracker fund and have another 50K in Premium Bonds for emergencies, liquidity and as a hedge.

Maybe the Vanguard fund, which I intend to leave alone until retirement, will suffice and I can go down the draw down route when 60? 

Alexland

AsifM068 said:

I've been scoping out both Investment Trusts such as City and London

...

I am hoping to achieve a dividend yield of around 5% with some capital growth with funds to be held in an ISA.

I wanted to own CTY for years but when I finally got around to buying it realised that I really didn't like the underlying holdings in terms of either their ESG credentials or their future prospects. A black box giving 5% is attractive but when you peek inside it's not great (deep value investing) and in my humble view the trust doesn't deserve the slight premium to NAV that it's often trading at. I didn't own it long and was lucky to hold it in a period the discount/premium was improving so managed to get out with a modest gain but still overall a mistake. I still follow it and wonder how deep the discount might go when Job eventually retires.

For UK income I sleep well holding Murray Income MUT which has a 1% lower yield but holds better quality companies unlikely to decay in value. Aberdeen Standard (can't bring myself to use their new stupid name) also manage Dunedin Income DIG which is smaller but has better inflation aligned dividend growth. Both of them have younger but still experienced managers and are taking ESG seriously which excludes around 25% of the UK market as uninvestable - a view I agree with. If going active then I don't want to own tobacco and old world oil companies.

Thrugelmir

Alexland said:

AsifM068 said:

I've been scoping out both Investment Trusts such as City and London

...

I am hoping to achieve a dividend yield of around 5% with some capital growth with funds to be held in an ISA.

 are taking ESG seriously which excludes around 25% of the UK market as uninvestable - a view I agree with. If going active then I don't want to own tobacco and old world oil companies.

Orsted was an world oil company not that long ago............

Alexland

Thrugelmir said:

Orsted was an world oil company not that long ago............

Are you really expecting much from the big oil companies listed on the UK market? If they can change into something else then yes they might become investable again but for now it mostly seems to be greenwashing and buying into their structural problems. No thanks.

dunstonh

I am hoping to achieve a dividend yield of around 5% with some capital growth with funds to be held in an ISA.

Any reason why you have selected the ISA wrapper over the pension wrapper? (pension being best for most people - although not all)