Buying investment trusts can be a great way to invest in the stock market.
These investment vehicles acquire portfolios of stocks or other assets to meet their investment objectives. These objectives can be anything from outperforming the market to beating inflation or generating a specific income level.
I own several investment trusts in my portfolio, and I am currently looking for other trusts to buy with a focus on income generation.
Indeed, investment trusts have a unique quality that makes them attractive income investments.
Unlike other investment funds, they can hold back a percentage of revenue in good years. This revenue reserve can then be used in bad years to cover dividend payouts if income from the portfolio is not enough.
This was particularly handy last year when many companies cut their dividends. Investment trusts with revenue reserves were able to maintain their distributions to investors.
As such, here are two companies I would buy to meet this goal.
Income investment trusts to buy
The first trust on my list is Shires Income (LSE: SHRS). This investment trust owns a blend of different assets, including other investment trusts, fixed income investments and high-yield stocks.
According to the its latest factsheet, its largest holding at the end of May was the Aberdeen Smaller Companies Income trust. The second and third largest holdings were fixed income investments. These were the Ecclesiastical Insurance 8.875% and Royal & Sun Alliance 7.375% preference shares. The largest single stock holding was an investment in AstraZeneca.
The mixture of stocks, trusts, and fixed-income investments means the firm offers a higher dividend yield than average. It currently offers a yield of 4.7%.
The one drawback of this trust is that it has a relatively high ongoing charge of 1.21%. It may also be challenging for some investors to understand due to the complex mix of assets and fixed income securities.
Nevertheless, I like this blend of different assets, and I am attracted to the 4.7% dividend on offer. That’s why I would buy the investment trust today.
Diverse income
The second income investment trust I would buy today is the Diverse Income Trust (LSE: DIVI).
This company takes a different approach to income investing. It focuses purely on quoted or traded UK stock. Although it can invest in large firms, Diverse tends to concentrate on smaller businesses. The largest holding at present is the financial services firm CMC Markets.
The exposure to smaller companies could help the trust produce capital growth and income, which suggests it offers something different to Shires, as fixed income investments do not tend to generate capital growth.
That being said, smaller company stocks can be volatile. So, this investment trust might not be suitable for all investors.
Still, I think the trust offers something different. I am also attracted to its 3.2% dividend yield.
