The trusts that offer income investors the best of both worlds

Investment trusts are famed for their ability to hold back some of the income they receive, allowing them to continue increasing their dividend even when their underlying holdings are cutting theirs.

Nineteen trusts in the AIC universe have made full use of this by increasing their dividend for at least 20 years in a row – one of these, City of London Investment Trust, has done so for 50 consecutive years, while Bankers and Alliance Trust are not too far behind.

However, consistently raising your dividend doesn’t automatically equate to a high yield – Alliance Trust has increased its payout for 49 years in a row, for example, but its current yield is just 2.28 per cent.

Here are five trusts that offer the best of both worlds when it comes to income – those that have increased their dividend for more than 20 years in a row and that are currently yielding more than 4 per cent.

As has already been mentioned, City of London Investment Trust holds the record for the consecutive number of yearly dividend increases, at 50. Its yield of 4.21 per cent is also one of the highest among equity focused trusts in the AIC universe.

Investors who bought £10,000 worth of shares in January 2011 would have received £2,464.04 in dividends by January 2016.

Unlike the other trusts mentioned on the list, City of London has matched its income-producing prowess in total return terms. It has made 119.83 per cent over the past 10 years compared with 63.37 per cent from its IT UK Equity Income sector and 56.6 per cent from its MSCI UK benchmark.

Performance of trust vs sector and benchmark over 10yrs

Source: FE Analytics

However, its success is reflected in the fact it is trading on a premium of 4.6 per cent.

Job Curtis has managed the trust for more than 25 years. He takes a more cautious approach than many of his peers, with a heavy focus on FTSE 100 income favourites such as British American Tobacco, Shell and HSBC.

The trust is 9 per cent geared.

Next up is Murray Income, which is yielding 4.93 per cent and has increased its dividend for 42 years in a row. Investors who bought £10,000 worth of shares in January 2011 would have received £2,436.71 in dividends by January 2016.

The fund has struggled from a total return point of view, however – it has made 55.7 per cent since manager Charles Luke took charge in September 2006, compared with 55.78 per cent from its IT UK Equity Income sector and 59.1 per cent from its FTSE All Share benchmark.

Luke aims to achieve a high and growing income combined with capital growth through investing in a portfolio principally of UK equities.

In his most recent update to investors, he said the short term outlook is likely to remain difficult, before adding: “We remain confident that the best way to generate attractive long term returns is to invest in globally competitive businesses with robust balance sheets and experienced management teams capable of navigating their way through this challenging environment.”

Murray Income is currently 8 per cent geared. It has ongoing charges of 0.74 per cent and is on a discount of 6.5 per cent.

Merchants Trust is the highest yielding of all the trusts on this list, with a figure of 5.9 per cent, and has increased its dividend for 34 years in a row.

Investors who bought £10,000 worth of shares in January 2011 would have received £2,839.81 in income by January 2016.

Again though, the trust has not done so well from a total return point of view. Data from FE Analytics shows it has made 49.67 per cent since manager Simon Gergel took charge just over a decade ago, compared with 51.72 per cent from its FTSE 100 benchmark and 52.1 per cent from its IT UK Equity Income sector.

Performance of trust vs sector and benchmark over manager tenure

Source: FE Analytics

Gergel takes a value-orientated approach to the market and tends to only invest in higher yielding mega-caps which he believes aren’t at risk of cutting their dividend.

It has a concentrated portfolio – its top-10 accounts for 46.2 per cent of assets – with GlaxoSmithKline, Shell and HSBC among its largest holdings.

The trust is 21 per cent geared, has a total expense ratio of 0.47 per cent and is on a discount of 1.4 per cent.

The penultimate trust on the list is Scottish American, which has delivered 36 years of dividend growth and is yielding 4.06 per cent. Investors who bought £10,000 worth of shares in January 2011 would have received £2,048.88 in income by January 2016.

The trust aims to grow the dividend at a faster rate than inflation by increasing capital and growing income. It primarily focuses on global equities, but also makes investments in bonds, property and other asset types.

Again the trust has underperformed over the past 10 years, making 89.23 per cent over this time compared with 112.93 per cent from the FTSE All World index and 89.83 per cent from its IT Global Equity Income sector. Manager Dominic Neary has only been in charge since February 2014, however.

The trust is 23 per cent geared, has ongoing charges of 0.94 per cent and is on a premium of 4 per cent.

With “only” 20 consecutive years of dividend growth, Schroder Income Growth only just made it on to the list.

However, it is yielding 4.36 per cent and investors who bought £10,000 worth of shares in January 2011 would have received £2,436.71 in dividends by January 2016.

The fund has made 44.88 per cent since manager Sue Noffke took charge just under five years ago, which is more than the 30.33 per cent made by its FTSE All Share benchmark over this time, but again is less than the amount made by its IA UK Equity Income sector.

Performance of trust vs sector and benchmark over manager tenure

Source: FE Analytics

Noffke takes a value approach to the market and runs a concentrated portfolio. She is focused on delivering a good and growing level of income to investors, which is one of the reasons Keplar’s William Heathcoat Amory and his team included it in their Investment Trust Intelligence “Bulletproof Income” portfolio of investment trusts.

Schroder Income Growth has gearing of 9 per cent. It has ongoing charges of 1 per cent and is on an 8 per cent discount.