I believe investment trusts are one of the best ways to invest in the market, especially if one is looking for a passive income.
Unlike other funds, investment trusts operate as companies. This means they have a level of flexibility regarding how much income they can distribute to investors as dividends. The structure also gives these businesses more flexibility for choosing investments.
Most investment trusts focus on stocks and shares, but some own commercial property, precious metals, private equity, hedge funds and even renewable energy assets.
Another quirk of the investment trust structure is the ability to hold back a percentage of income every year. This enables investment trusts to hold back revenue in the good times to cover dividend payouts when the going gets tough. This proved extremely helpful in 2020 when many blue-chip companies slashed their dividends. Investment trusts were able to dig into their dividend reserves to cover shareholder payouts.
So, with that in mind, here are two investment trusts I would buy today to retire on a rising, passive income.
Passive income investments
There are a handful of investment trusts that have maintained their dividends for several decades. One of these is the City of London Trust (LSE: CTY). This firm prides itself on its dividend track record. It has maintained the distribution to investors since 1966.
At the time of writing, the trust provides a dividend yield of 5.1%. To cover this income stream, it owns a portfolio of blue-chip income stocks. Some 86% of the portfolio is invested in UK equities, with the remainder spread worldwide to provide a level of diversification.
As well as targeting a steady stream of income, the trust also aims to achieve a level of capital growth every year. It has been relatively successful on this front, achieving a total return of nearly 100% over the past 10 years.
As long as the investment management sticks to the strategy that has been so successful over the past decade during the next 10 years, I think City of London could be one of the best investments to own when looking to build a passive income stream.
Growth and income
With a dividend yield of 6.4% of the time of writing, the Value & Income Trust (LSE: VIN) could be another option for passive income investors like me.
This trust uses an interesting model to generate income for its shareholders. Some 41% of the portfolio is invested directly in property across the UK. This provides exposure to the asset class and an uncorrelated income stream. The rest of the portfolio is invested in high-quality blue-chip stocks.
As such, investors receive the best of both worlds. Income from high-quality global dividends and a steady stream of income from property here in the UK.
Unfortunately, due to the pandemic, Value & Income’s exposure to UK property has become a bit of a liability. Investors have dumped the stock as a result. It’s now trading at a discount of 23% to its underlying net asset value. However, I think this could be a great opportunity for long-term investors seeking a passive income to buy up a portfolio of high-quality income-generating assets at a discount. It’s on my watchlist.