Income options

Bank and building society returns to savers are falling, with some economists predicting further cuts to come, while pay settlements for millions of workers suggest inflation may rise in future. So investors who can afford to accept some degree of risk should consider how they might obtain rising and sustainable income to preserve the real value or purchasing power of their money.

Last month the Bank of England (BoE) cut its base rate for the first time since March, 2020. Nearly two thirds of economists – or 39 out of 60 quizzed by the news agency Reuters – said they expect to see base rate trimmed again from its current level of 5% to 4.75% before the end of this year.

Meanwhile most NHS workers, teachers and members of the Armed Forces have agreed inflation-busting pay rises. The Consumer Prices Index (CPI) increased by 2.2% in the year to July, while the Retail Prices Index (RPI) rose by 3.65%. Even at apparently low levels, inflation erodes the real value of money. For example, the BoE calculates you would need £17.49 today to match the purchasing power of a tenner 20 years ago.

More positively, many investment trusts have demonstrated the ability to deliver pay rises for shareholders every year for long periods of time, despite such dramatic setbacks as the global financial crisis, Covid lockdowns and Europe’s worst war since 1945. No fewer than 21 investment trusts have increased their dividend distributions every year for 20 years without fail and an elite group of ten investment trusts have done so for an eye-stretching 50 years. See the AIC’s list of dividend heroes for more details.

While it is important to be aware that the past is not necessarily a guide to the future – and dividends can be cut or cancelled without notice – all types of investment trust enjoy important advantages for income-seekers. Unlike most forms of pooled funds, such as unit trusts and exchange traded funds (ETFs), investment trusts can retain some returns in good years for stock markets to sustain dividend distributions in bad years. That might prove important to many investors, including pensioners who still have bills to pay.

Equity income may prove an effective way to match or exceed inflation because some companies issuing shares – or ‘equities’ – can increase the price of the goods and services they sell. While that is not guaranteed and share prices can fall without warning, 19 investment trusts in the AIC UK Equity Income sector currently yield dividend income averaging 4.1%.

Better still, over the last five years these UK Equity Income investment trusts’ dividends have increased by an annual average of 3.2%. If that rate of ascent is sustained, it would double shareholders’ income in 22 years and six months, which is the kind of period many pensioners might expect to spend in retirement. Average ongoing charges are just 0.57%.

Investment trusts bring the world within reach, so it is worth considering the AIC’s Global Equity Income and Asia Pacific Equity Income sectors too. Both offer convenient and cost-effective ways to maximise returns and minimise risks that are specific to any single country.

Global Equity Income investment trusts currently yield an average of 4% income with dividends rising by an annual average of 5.3% over the last five years and average costs of 0.46%. Asia Pacific Equity Income investment trusts offer a higher initial yield, averaging 5.9%, rising by just over 5% per annum, with average costs of 0.91%.

While the above three AIC sectors offer dozens of different ways to generate equity income, it is important to remember that many investment trusts can deliver high and rising dividends, even if they do not have the words “equity” or “income” in their names or sector titles. For example, in the AIC’s Leasing sector, my shares in Tufton Oceanic Assets (stock market ticker: SHIP) currently yield 6.95%, having increased shareholders’ income by an annual average of 5.7% over the last five years. Similarly, Greencoat UK Wind (UKW) in the Renewable Energy Infrastructure sector, pays me 7.1% having increased dividends by 8.1% per annum over the same period.

Both the above are tax-free because I hold these investment trusts in my ISA. Tax shelters might prove particularly valuable, depending on what our first female Chancellor of the Exchequer, Rachel Reeves, announces in her first Budget on 30 October. Either way, investment trusts enable all of us to seek rising and sustainable income, whatever happens in future.
 

Ian Cowie is a shareholder in Tufton Oceanic Assets (SHIP) and Greencoat UK Wind (UKW) as part of a globally-diversified portfolio of investment trusts and other shares.