Purchasing shares in an investment trust has can have significant benefits for investors. These funds typically own a variety of assets, which reduces risk by way of diversification. Such investment vehicles can also make good use of gearing (or borrowed funds) to boost returns during good times.
These are just a couple of the advantages trusts offer. But one of the big ones for income investors is that many focus on returning cash to their shareholders through dividends and share buybacks.
Investment trusts are allowed to retain 15% of the income they receive each year as well, which they can use to boost dividends in tougher periods.
Passive income stocks: our picks
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There are more than 400 of these funds currently listed on the London Stock Exchange. Here are two of my favourites.
1. Greencoat UK Wind
I think businesses like Greencoat UK Wind (LSE:UKW) have significant investment potential as demand for clean power takes off. Their growth prospects may receive an extra boost if — as expected — planning rules for onshore wind farms are loosened too.
Greencoat acquired the South Kyle onshore project in Scotland last month, taking the total number of wind farms on its books to 48. Its portfolio is spread across the country, which in turn reduces the impact of unfavourable weather conditions in one or two places on group profits.
Keeping wind turbines up and running is an expensive business. What’s more, harsher environmental conditions due to climate change mean maintenance costs could rise steeply in the years ahead. Yet the benefits of the UK’s rapid transition from fossil fuels to renewable energy more than offset this problem, in my opinion.
Greencoat stock carries a 6.8% dividend for 2023. And brokers expect its strong record of annual dividend growth to continue for the next few years at least.
2. The PRS REIT
As the name implies, residential lettings specialist The PRS REIT (LSE:PRSR) is a real estate investment trust. As a consequence it has to distribute a minimum of 90% of annual rental profits in the form of dividends, making it an attractive pick for dividend investors.
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In fact I’m expecting this share to deliver large dividends for years to come. Rents are booming as the supply of new homes fails to keep up with demand: at PRS, like-for-like rental income leapt 9.8% during the three months to September, latest financials showed.
The Royal Institute of Chartered Surveyors has predicted average UK rent growth of 5% over the next 12 months. But PRS’s focus on the family home sector (where property shortages are especially severe) means rental increases here should again soar past the industry average.
PRS carries a 5.5% dividend yield for this financial year (to June 2024). And as with Greencoat UK Wind, City analysts expect dividends here to rise next year and to keep growing, pushing the yield even higher.
