Maintain your income despite rate cuts
David Prosser on why investment trusts may be a great choice for income seekers.
What does the Bank of England have in store for interest rates this year? The latest economic data, many experts believe, suggests the Bank will cut rates more aggressively than has previously been expected.
Financial markets have been pricing in two reductions for 2025; however, a poll of economists conducted in recent days by Reuters following sluggish GDP growth numbers and lower-than-forecast inflation found the majority now think rates will come down four times this year.
That would take the Bank’s base rate down to 3.75% – good news for mortgage borrowers, but not so much for savers. By the end of this year, bank and building society accounts are likely to look much less attractive; nor is there much prospect of the bond markets offering more generous yields, despite all the volatility we have seen in recent weeks.
In which case, income seekers will need to look elsewhere – almost certainly to the dividends paid by listed companies. And here at least there is some good news: analysis published recently by the investment platform AJ Bell predicts the UK’s largest companies will pay out £83.6bn of dividends over the course of 2025, up 6.5% on last year’s total of £78.5bn.
We are also seeing some bullish forecasts for the dividend outlook in other stock markets worldwide. In the US, for example, the tax cuts that President Trump has promised businesses should enable them to increase payouts to shareholders.
With the outlook for interest rates shifting, income-focused investors need to start making plans.
David Prosser
Against this backdrop, a new report from the investment trust research team at stockbroker Peel Hunt is well-timed. It picks out 10 investment trusts that the team believes could really deliver for income seekers in 2025. “We continue to place emphasis on companies that offer a source of differentiated yield and have delivered inflation feed-through, translating the higher inflation backdrop into meaningful dividend growth,” says Peel Hunt. “The average dividend yield on offer across our top picks is 5.8%”.
Why focus on investment trusts if income is your priority? Well, investment trusts have a unique advantage in this regard. Unlike any other type of collective investment vehicle, they are allowed to hold back some of the dividends they earn in good years; this money, held in dividend reserve funds, can then be used to support payouts to investors in leaner years. The effect is to smooth out income distributions to investors, rather than leaving them at the mercy of the effects of market volatility.
It's important to remember that investment trust share prices can fall as well as rise – just as is the case with any stock market investment. Nor can investment trusts promise to maintain or increase income distributions. But the rules on dividend reserve funds make it less likely that distributions will be reduced.
Indeed, it is this advantage that underpins the AIC’s Dividend Heroes, a list of 20 trusts that have increased their annual dividend in each and every year for at least 20 years (and in some cases for more than 50 years). Even during the most challenging market conditions – from the global financial crisis to the Covid-19 pandemic – these funds have been able to raise what they pay out to shareholders each year.
For investors particularly focused on income, it makes sense to consider equity income trusts, which are run with both income and capital growth objectives in mind, rather than just the latter. You don’t have to stick to the UK market – there are a wide variety of equity income trusts offering international exposure, both to a range of markets and in individual regions or countries.
Peel Hunt’s investment trust selection for 2025 features no fewer than five equity income funds: JPMorgan Global Growth & Income, Law Debenture Corporation, CC Japan Income & Growth, abrdn Asian Income and BlackRock Frontiers. Beyond these five, it also features BBGI Global Infrastructure, Octopus Renewables Infrastructure, Greencoat UK Wind, BioPharma Credit and Cordiant Digital Infrastructure, all of which offer possibilities for income seekers who want exposure to other asset classes in addition to (or rather than) equities.
Naturally, there are no guarantees. Still, with the outlook for interest rates shifting, income-focused investors need to start making plans. These funds could be part of those considerations.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
