This is the fifth Gavatar video guide on investment trusts. See ‘related news’ for previous videos in the series.
Can’t watch now? Read the transcript
Investment trusts are very useful for people seeking income from their money.
Like other pooled investment funds, investment trusts earn income on most of the money they invest.
They can receive dividends from companies whose shares they hold and be paid interest on loans to governments and businesses they buy.
Investment trusts are also better suited to hold other types of assets, such as commercial property and infrastructure, which are hard for other funds to buy and sell but offer good income.
When it comes to paying out all this income to their shareholders as dividends, investment trusts have one big advantage.
Unlike other funds that have to pay out all the income in the year they receive it, investment trusts can hold back up to 15%, giving them more control of the income they generate.
This means in good years they can put aside a bit of money to build a pot of cash they can dip into when there is less investment income.
None of the sources of investment income I have mentioned are guaranteed. Like all stock market investments they can rise and fall.
But with these pots of money – or ‘revenue reserves’ – investment trusts can smooth their dividends and increase payments in years when income has fallen or is flat.
With careful management investment trusts can build up long records of dividend increases in this way.
A few investment trusts have grown dividends in every year for over half a century!
Many more trusts have achieved consecutive annual rises in their pay-outs for more than 20 years. Often the dividend increases have been ahead of inflation, which means the real value of that income is preserved.
No other form of investment fund can match those long records of steadily growing dividends through good times and bad.
Recently, some trusts have started paying dividends from the gains they have made on their investments as well. This can reduce their overall growth but is another useful tool.
Most investment trusts that pay dividends do so every quarter, with some making monthly payments to make the lives of income investors easier.