An investment strategy focused on dividend stocks can be a great way to build long-term wealth.
By reinvesting dividends I receive, I can substantially boost my returns by earning money on my initial capital investment as well as those income payments.
With my total dividends rising over time as the number of shares I hold increases, the power of compounding significantly enhances my overall returns, leading to exponential growth in my investment portfolio.
Passive income stocks: our picks
Do you like the idea of dividend income?
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Investment trusts can be excellent shares to buy to help me make this a reality. Many are focused specifically on generating income for their shareholders. And with a diversified range of assets and professional management teams, they offer the potential for steady and reliable income streams.
There are many such trusts for UK investors to choose from today. Here are three of my favourites that I think are worth serious consideration.
City of London Investment Trust
City of London Investment Trust (LSE:CTY) is one of the London stock market’s greatest dividend aristocrats. It’s raised the annual dividend for a staggering 57 years on the spin.
At 432p, the trust carries a trailing dividend yield of 4.7%. That’s more than a percentage higher than that of the broader FTSE 100 index.
City of London’s highly geared towards British blue-chip stocks like BAE Systems, RELX, HSBC and Unilever. These businesses tend to be sound investments over time, thanks to their market-leading positions and solid balance sheets.
More than 88% of City of London’s capital is allocated in UK shares. Investors should be mindful that this could lead to disappointing results if economic conditions in Britain worsen.
Alliance Trust
Alliance Trust (LSE:ATST) may be a better buy for investors seeking greater geographical diversification. Right now, 57% of its money is tied up in US equities. The remainder is spread broadly across other global regions.
As with City of London, the trust is also focused on stable, market-leading multinational businesses. Key holdings here include Microsoft, Amazon, Visa and Nvidia.
Alliance has a larger weighting towards tech stocks than many other trusts. This gives investors a chance to exploit hot growth themes like artificial intelligence (AI), though on the downside it also means returns may be more vulnerable during economic downturns.
At £12.20 per share, the trust’s trailing dividend yield is 2.1%. It has also raised annual dividends for 57 straight years.
The Merchants Trust
The Merchants Trust (LSE:MRCH) has fewer years of steady dividend growth than those other two. But at 42 years, it can clearly still be considered a top dividend aristocrat.
Some of the largest holdings here include GSK, Shell, British American Tobacco and Barclays. Almost 45% of its capital is tied up in just 10 companies though, which makes it less diversified in this respect than certain other trusts.
At 576p per share, Merchants boasts a trailing dividend yield of 4.9%. Its exposure to cyclical, sensitive, and defensive sectors suggests it could continue to deliver a healthy passive income to investors.
