Investors are drawn to buy-to-let because it offers a combination of rental income and capital growth. However, you can get both of these with a lot less effort through investment trusts, and take all of your returns free of tax inside your Stocks and Shares ISA.
Income heroes
The most consistent ‘dividend heroes’ can now be named as Caledonia Investments (LSE: CLDN), the Bankers Investment Trust (LSE: BNKR) and JPMorgan Claverhouse Investment Trust (LSE: JCH). These investment trusts have the distinction of raising their dividend by more than inflation every single year — without interruption — for two decades, according to new research from investment platform AJ Bell.
As well as offering consistent dividend growth, Caledonia and Bankers generated a total return of a massive 580.4% and 474.3%, respectively, over the last 20 years, while also increasing dividends by 5.3% and 6.5% a year on average. The beauty of a rising dividend is that it helps you beat the eroding effect of inflation, and give you a steadily growing income in retirement.
I’ve included long-standing investment trusts F&C and Witan in the table below, because they also deserve respect for increasing their dividends by 7.2% and 6% a year, respectively, over the same 20-year period.
|
Company name |
Number of years it didn’t beat inflation |
Average annual dividend increase over 20 years (%) |
20-year performance (total return) |
|
Caledonia |
0 |
5.3 |
580.4% |
|
Bankers |
0 |
6.5 |
474.3% |
|
JPMorgan Claverhouse |
0 |
7.2 |
196.1% |
|
F&C Investment Trust |
1 |
7.2 |
392.6% |
|
Witan |
1 |
6.0 |
318.8% |
Caledonia, which can trace its roots back to 1878, currently has around £2bn under management. It runs a concentrated portfolio of international investments and funds, targeting proven businesses with long-term growth characteristics and the ability to deliver rising income. This is no closet benchmark tracker. Its 10 largest holdings are mostly unfamiliar names to me such as Deep Sea Electronics, Cobehold and Buzz Bingo, although Microsoft was really recognisable at number 10.
As Alan Oscroft recently noted, Caledonia has now increased its dividend for 52 consecutive years, yet it currently trades at a massive discount of 16.3% to net asset value.
Bankers Investment Trust aims to beat the FTSE World Index for capital growth while generating annual dividend growth above the UK retail prices index, again by investing in global listed companies. It’s 30% invested in North American, with slightly less cover in the UK, while the remainder of its £1.17bn portfolio is divided between Europe, Asia-Pacific and Japan.
Mainstream
Here the stock picks are a lot more mainstream, with American Express, Microsoft, Berkshire Hathaway, MasterCard and Visa figuring in its top 10 holdings. The discount isn’t as generous, with just 2.11% to net asset value, but its differing holdings mean it could nicely complement Caledonia in your retirement portfolio.
JP Morgan Claverhouse is a UK equity income fund with a conviction portfolio of between 60 and 80 stocks. It’s also a smaller fund, with £434m under management, and returns are impressive given how the UK has underperformed compared to many global markets. It currently trades at a discount of 4.7% to net asset value.
These three investment trusts could give you all the joys of rising growth and income, with none of the trouble of dealing with buy-to-let tenants.