Investment Trusts query

AsifM068

Morning forum,

Do investment trusts sell shares from its fund to pay its dividend; if so I can't see the positive and can't see the difference from selling 4 to 5% per year from the principle of a unit trust for example? Hope this makes sense as I am still very new to the investment space.

Many thanks.

ColdIron

Some do, some don't

In general the trust will receive dividends from their underlying investments and pass them on to you as a dividend. In good years ITs can withhold some of those dividends and pay them out in lean years providing a smoother income stream without having to sell anything

High yield ITs may sell some of the underlying holdings though there is usually little prospect of capital or share price growth with these. However this approach works for some investor scenarios

Horses for courses

masonic

There's a convenience factor in having an income automatically come in from natural yield vs drawing down. The tax treatment is also different. In the end though, it is total return that matters and providing the total return supports your income needs over the long term, it doesn't really matter how you take it.

Rollinghome

AsifM068 said:

Morning forum,

Do investment trusts sell shares from its fund to pay its dividend; if so I can't see the positive and can't see the difference from selling 4 to 5% per year from the principle of a unit trust for example? Hope this makes sense as I am still very new to the investment space.

Many thanks.

ITs don't pay CGT on share sales.  You do if you exceed the CGT allowance.  But you also pay tax on divis if you normally pay income tax and exceed the £2k divi allowance.

AsifM068

ColdIron said:

Some do, some don't

In general the trust will receive dividends from their underlying investments and pass them on to you as a dividend. In good years ITs can withhold some of those dividends and pay them out in lean years providing a smoother income stream without having to sell anything

High yield ITs may sell some of the underlying holdings though there is usually little prospect of capital or share price growth with these. However this approach works for some investor scenarios

Horses for courses

Thank you sir.

AsifM068

Thank you forum - I'm going to set up a 'pie' on Trading 212 with a 50/50% split of City of London and Murray Investment trust and DRIP feed the dividends and review after a year; can't see the harm as these are dividend heroes from past performance (but who knows what tomorrow brings...) and income investing appeals to me as I approach retirement.. As for global growth, well, my Vanguard FTSE Global All Cap has barely barely broken ever since last July '21...just have to hang in like the rest of the planet. I have another 6 years until retirement and hope this will allow for a turnaround at some point

NedS

AsifM068 said:

Morning forum,

Do investment trusts sell shares from its fund to pay its dividend; if so I can't see the positive and can't see the difference from selling 4 to 5% per year from the principle of a unit trust for example? Hope this makes sense as I am still very new to the investment space.

Many thanks.

Some trusts do exactly that - JGGI for example invests globally for growth and pays out 4% of NAV per year from income and capital (mostly capital). You can achieve exactly the same thing by owning a global equity tracker and selling 1% every quarter, although some like the convenience of the manager doing it for them. These trusts are clearly targeting income investors and work great for less savvy, uninterested or older investors who just want a set and forget solution in retirement.

Others will invest in income paying stocks and only ever pay a dividend out of income. Overall returns tend to be lower as companies that pay out high dividends tend to exhibit lower growth as that cash is not being reinvested back into the company to help grow the company.

AsifM068

NedS said:

AsifM068 said:

Morning forum,

Do investment trusts sell shares from its fund to pay its dividend; if so I can't see the positive and can't see the difference from selling 4 to 5% per year from the principle of a unit trust for example? Hope this makes sense as I am still very new to the investment space.

Many thanks.

Some trusts do exactly that - JGGI for example invests globally for growth and pays out 4% of NAV per year from income and capital (mostly capital). You can achieve exactly the same thing by owning a global equity tracker and selling 1% every quarter, although some like the convenience of the manager doing it for them. These trusts are clearly targeting income investors and work great for less savvy, uninterested or older investors who just want a set and forget solution in retirement.

Others will invest in income paying stocks and only ever pay a dividend out of income. Overall returns tend to be lower as companies that pay out high dividends tend to exhibit lower growth as that cash is not being reinvested back into the company to help grow the company.

Thank you for this, this confirms what I thought.