Where to invest money primarily for supplemental income

JohnWinder

This point brings another question: can investment trusts be bought and sold as readily as shares? And now I think of it, same question re funds.

Well, some (?all) trusts limit/fix the amount of money they’ll hold to invest in other companies, which can result in them trading at prices above or below the value of the companies they hold. That would seem to reduce their liquidity, because if they are trading well above the value of their assets people are less keen to pay over the odds for them and so you can have difficulty selling without dropping your price more than otherwise. I don’t think that can happen with ordinary shares or exchange traded funds because financial institutions are authorised to jump in and make some money while pulling the price back to real value. City of London is currently trading at a small premium, meaning every dividend you get in future is reduced by the value of that premium you had to pay to buy it. It’s not much, 2% of 5%, but no thanks. And it’s less diversified than plenty of alternatives with cheaper management fees. Still, it’s very popular. 

Linton

JohnWinder said:

This point brings another question: can investment trusts be bought and sold as readily as shares? And now I think of it, same question re funds.

Well, some (?all) trusts limit/fix the amount of money they’ll hold to invest in other companies, which can result in them trading at prices above or below the value of the companies they hold. That would seem to reduce their liquidity, because if they are trading well above the value of their assets people are less keen to pay over the odds for them and so you can have difficulty selling without dropping your price more than otherwise. I don’t think that can happen with ordinary shares or exchange traded funds because financial institutions are authorised to jump in and make some money while pulling the price back to real value. City of London is currently trading at a small premium, meaning every dividend you get in future is reduced by the value of that premium you had to pay to buy it. It’s not much, 2% of 5%, but no thanks. And it’s less diversified than plenty of alternatives with cheaper management fees. Still, it’s very popular. 

I think you misunderstand the situation.  It is all very simple. ITs are normal companies whose business happens to be to deal in other investments.

 ITs dont "fix" the amount they invest - the initial investors paid for the shares when first issued to provide the ITs with capital.  From that point the company's investments are constrained by the capital they hold, or can borrow, with the current price being decided by the markets just like any other company share.  Again like any other company instead of buying the share you could decide to go into the same business yourself and avoid all  those costs and overheads.    However whether you could do it as effectively or as cheaply may be open to question.

Extra capital may of course be raised at any time by the issue of extra shares.  Just like any other company can do.  However normally you buy and sell IT shares from other investors.  The IT company is not affected in any way. Unlike a fund an IT does not have to buy and sell the underlying investments to match the trades of the individual investors which must reduce costs.

Just like any other company the market price may be above or below a formal valuation.  Do you only invest in companies whse share price is below the book value? Similarly the premium for an IT may be positive or negative.  In some cases it may well be inaccurate since valuations are not undertaken continuously.  And the premium when you sell may be higher or lower than when you bought.  A small amount of extra risk may be, but certainly not a charge.

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LHW99

Another question is how old? At perhaps 65+ an inflation linked annuity could make sense for at least part of the money. At 45 that's unlikely. Hence I'd second talking to an independent adviser

Linton

BruceThunder said:

Have I got this right?

I think I'm being told here that regarding the 3% (as a current example), it might be more realistic to expect this when adding yeild to capital growth, and thereby not particularly expecting effective long-term growth at all. This, I'm certain, would make the lady happy enough - she won't be here forever and a decent sum should be left to pass on (though this concern is secondary at best and not to be considered here).

All the replies have shed light on the situation and are appreciated.

*She isn't naive enough to panic and sell when capital values slump. This point brings another question: can investment trusts be bought and sold as readily as shares? And now I think of it, same question re funds.

Although the future is completely unknown 3% yield + sufficient growth to match inflation is not an unreasonable hope.  The following graph shows City of Londons price (without reinvestment of dividends) against CPI for the past 34 years:

jimjames

BruceThunder said:

This point brings another question: can investment trusts be bought and sold as readily as shares? And now I think of it, same question re funds.

Investment trusts are companies with shares so they are bought and sold exactly the same way. In the same way as smaller companies might have limited shares being bought & sold each day if the IT is small then the market in the shares might be more limited with high spread between buy & sell. But a big IT like Scottish Mortgage has minimal spread and thousands of shares traded daily.

Audaxer

Linton said:

BruceThunder said:

Have I got this right?

I think I'm being told here that regarding the 3% (as a current example), it might be more realistic to expect this when adding yeild to capital growth, and thereby not particularly expecting effective long-term growth at all. This, I'm certain, would make the lady happy enough - she won't be here forever and a decent sum should be left to pass on (though this concern is secondary at best and not to be considered here).

All the replies have shed light on the situation and are appreciated.

*She isn't naive enough to panic and sell when capital values slump. This point brings another question: can investment trusts be bought and sold as readily as shares? And now I think of it, same question re funds.

Although the future is completely unknown 3% yield + sufficient growth to match inflation is not an unreasonable hope.  The following graph shows City of Londons price (without reinvestment of dividends) against CPI for the past 34 years:

Interesting to see a graph of the CTY share price over such a long period.  Anyone who retired in 1988 with just that one IT would have done okay with increasing income every year from the dividends alone. It's only a small percentage of my portfolio but I hope it manages to keep increasing it's dividend and grow the capital over the long term.

NedS

Audaxer said:

Linton said:

BruceThunder said:

Have I got this right?

I think I'm being told here that regarding the 3% (as a current example), it might be more realistic to expect this when adding yeild to capital growth, and thereby not particularly expecting effective long-term growth at all. This, I'm certain, would make the lady happy enough - she won't be here forever and a decent sum should be left to pass on (though this concern is secondary at best and not to be considered here).

All the replies have shed light on the situation and are appreciated.

*She isn't naive enough to panic and sell when capital values slump. This point brings another question: can investment trusts be bought and sold as readily as shares? And now I think of it, same question re funds.

Although the future is completely unknown 3% yield + sufficient growth to match inflation is not an unreasonable hope.  The following graph shows City of Londons price (without reinvestment of dividends) against CPI for the past 34 years:

Interesting to see a graph of the CTY share price over such a long period.  Anyone who retired in 1988 with just that one IT would have done okay with increasing income every year from the dividends alone. It's only a small percentage of my portfolio but I hope it manages to keep increasing it's dividend and grow the capital over the long term.

Also interesting to plot a 3 year total return for CTY against a global growth trust like Monks (mnks). The tortoise and the hare springs to mind.

JohnWinder

‘  The City of London Investment Trust has increased its dividends for 55 consecutive years.’ https://www.janushenderson.com/en-gb/investor/product/the-city-of-london-investment-trust-plc/

Anyone who retired in 1988 with just that one IT would have done okay with increasing income every year from the dividends alone.

That website indicates dividends were unchanging at 4.7p/ps (whatever that means) from 2019 to 2021. Is that increasing dividends every year?

NedS

JohnWinder said:

‘  The City of London Investment Trust has increased its dividends for 55 consecutive years.’ https://www.janushenderson.com/en-gb/investor/product/the-city-of-london-investment-trust-plc/

Anyone who retired in 1988 with just that one IT would have done okay with increasing income every year from the dividends alone.

That website indicates dividends were unchanging at 4.7p/ps (whatever that means) from 2019 to 2021. Is that increasing dividends every year?

Yes, 2019 paid 18.6p (2 x 4.55p, 2 x 4.75p), 2020 paid 19.0p (4 x 4.75p) and 2021 paid 19.1p (2 x 4.75p, 2 x 4.80p) dividend per share. This year it will be 19.6p (2 x 4.80p, 2 x 5.00p), rising again for the 56th consecutive year.

Financial years are not aligned with calendar years. Admittedly they did pay a dividend of 4.75p for 8 consecutive quarters split over the 3 years straddling Covid, but they did continue to raise the dividend every year whilst many cut or stopped paying a dividend completely.

JohnWinder

Thanks. If I’ve got it right, CoL over the period in question paid a dividend which increased each calendar year, but for two successive financial years (4/19 - 1/21, 8 consecutive quarters) the dividend was unchanged.
Back to calendar years: in 2011 the dividend was 13.28p, and in 2012 it was the same. https://www.dividendmax.com/united-kingdom/london-stock-exchange/investment-trusts/city-of-london-investment-trust/dividends