What’s the best way to convert a lifetime of saving and investment into something that will generate steady passive income? The last thing I want to do is transfer all my cash to a savings account paying a pittance in interest just to provide safety.
I much prefer to invest in shares that pay dividends. If I can get 4% or 5% per year in income, that should beat the pants off what the bank can offer. And I’d hope to enjoy some share price gains too.
But during tough times, companies often cut their dividends. And then a dividend strategy can go badly off the rails. Here’s the way I intend to minimise my risk, while still investing for dividends.
The closer I get to retirement and to wanting to take my passive income, the more I will switch my money to buying shares in Dividend Heroes. But what are those?
Dividend rises
The list covers investment trusts that have raised their dividends every year for at least 20 years in a row. It’s maintained by the Association of Investment Companies, and I find it a very useful resource.
Investment trusts can retain cash in better years to cover dividends in weaker years. And the fact that these companies have made it onto the list suggests they’re serious about maintaining their enviable records.
The one with the longest track record, City of London Investment Trust, has increased its annual cash payments for 56 years in a row. It is, in my opinion, likely to do everything it can to keep that going. Right now, it’s offering a 4.8% dividend yield from UK equities.
Diversification
To spread the risk, I might go for Alliance Trust too, which invests globally. The dividend yield is only 2.4% now. But if I buy today and it keeps rising every year, the effective yield I might get in another 10 or 20 years on my initial investment could be significantly higher. Oh, and it’s grown its dividend for 55 years.
Murray Income trust is another I like on the list, having kept its dividends heading upwards for 49 years in a row. In this case, we’re looking at a yield of 4.3%.
And if I really want to diversify, I might even put some money into Value and Indexed Property Income Trust. It invests in UK commercial property, which might seem a bit risky. But it offers a 5% dividend yield, which it has grown for 35 years in a row.
Growth too
There’s something else I find interesting about these, other than the dividends themselves. The ones with lower dividend yields have been generating some impressive share price gains. So it looks like their long-term track records are keeping growth investors interested too.
This is an approach that I favour for turning my long-term investing cash into regular passive income. It definitely does not eliminate risk. After all, any of these trusts could go wrong and wreck their track records. But it offers a risk-to-reward ratio that suits me personally.