Investment trusts are a brilliant way of generating passive income from a diversified portfolio of shares, and the best can offer a really high yield.
While I prefer to pick my own dividend income stocks, investment trusts can do a brilliant job, too. The very best aim to pay a steadily rising income by retaining some dividends in the good years and using them to top up returns when businesses are cutting shareholder payouts.
JP Morgan Claverhouse Investment Trust (LSE: JCH), launched in 1963, has increased its annual payout for an incredible 50 consecutive years, making it a true Dividend Aristocrat. It has done this by investing in a pool of UK equity income stocks. The trust’s top 10 holdings include familiar names such as Shell, HSBC, AstraZeneca, BP, and Glencore.
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Consistent income growth
Currently, it yields an attractive 5.32% a year. That’s comfortably above the FTSE 100 average, which is closer to 3.8%. While dividend income is never guaranteed, Claverhouse is one of the safest ways of getting access to the rising passive income stream they offer.
Its share price total return isn’t as impressive as I’d like. As my table shows, the £383m fund has struggled to beat its benchmark, the Association of Investment Companies UK Equity Income Sector. Its 10-year return is impressive though.
| One year | Three years | Five years | 10 years | |
| JPM Claverhouse | -0.7% | 36.1% | 7.00 % | 77.5% |
| AIC Equity Income | 3.6% | 36.5% | 17.6% | 69.5% |
Claverhouse is currently trading at a discount of 5.51% to the value of its underlying assets. That reflects a tough year for UK shares. Now could be a good time to buy before interest rates peak and UK shares recover. Its ongoing charge is 0.7% a year.
The Lowland Investment Company (LSE: LWI) also offers investors a combination of growth and income from stocks mostly listed on the FTSE All-Share, and currently yields marginally more at 5.42%.
Aim high, buy Lowland
Managed by Janus Henderson, Lowland also features Shell, BP, and HSBC among its top 10 holdings. It also invest in small and medium-sized companies, with big positions in companies I don’t know much about, such as FBD, Irish Continental Group, and Serica Energy. Its long-term total return has been surprisingly low at just 26% over 10 years, which leaves it well below its benchmark. Yet the last three years were more impressive.
| One year | Three years | Five years | 10 years | |
| Lowland | -3.20% | 40.50% | -4.80 % | 26.00% |
| AIC Equity Income | 3.6% | 36.5% | 17.6% | 69.5% |
Lowland, also launched in 1963, has increased its dividend every year for the last 13 years, so it’s not at Claverhouse levels yet. What really tempts me is that the £398m fund trades at a wide discount of 12.6% to its underlying net assets. The ongoing charge is 0.6% a year.
If I split a £20,000 Stocks and Shares ISA allowance between these two investment trusts, I would get a yield of 5.37% a year. That will give me £1,074 a year. Better still, history suggests that will rise steadily over time.
Investors who want a manager to pick stocks on their behalf could do a lot worse than buying these two investment trusts. Personally, I’d hope to do better with a concentrated portfolio of around a dozen dividend income stocks I bought myself.
