Imperial Brands

With a 9.0% dividend yield, tobacco maker Imperial Brands (LSE: IMB) offers a payout rate higher than inflation. Not only that, but the company’s progressive policy means that it hopes to raise the dividend annually in coming years.

That increase may not be big – last year it was just 1% — but even if Imperial simply maintains its current dividend, the yield looks attractive to me. However, is that likely? After all, the company cut its dividend a couple of years ago and the market for cigarettes is in long-term decline.

Although I see that as a threat to Imperial’s profits, the question for me is just how long is the long term? After all, cigarette sales have been in steady decline for several decades already in many markets, yet last year Imperial still managed to record profits of £2.9bn. Its balance sheet is also in better shape than before, as it has been paying down debt.

For now, Imperial is trying to gain cigarette market share in five key countries. Along with its pricing power, that could help it keep eking out profits even in markets where total cigarette sales volumes are falling. The company’s brand portfolio could also help it grow new revenue streams in future, for example in areas such as vaping. For now I see Imperial as a cash cow business. The good news is that I can benefit from some of the cash that it is generating and paying out as dividends. That is why I would consider buying Imperial shares for my portfolio.

M&G

The investment manager M&G (LSE: MNG) offers a lower dividend yield than Imperial. But at 8.5%, it is still well ahead of the FTSE 100 average – and inflation.

Unlike tobacco, I reckon the total market size for its services could grow in the future. Financial services are an important part of a developed economy and I think future demand will be robust. M&G also benefits from a strong, well-established brand and reputation. That matters a lot in the investment management field. If people or institutions are going to entrust large amounts of their money to a business, they want reassurance that it is a reputable one.

On top of that, M&G’s stated policy is to maintain or grow its dividend each year. If it delivers on that and I buy it today, I could lock in an 8.5% yield. But as that is well above the FTSE 100 average, how dependable is it? Does the M&G share price and yield suggest investor scepticism that it can maintain its payout?

The reality is that no dividend is ever guaranteed. A recession could make customers pay closer attention to investment performance and move their portfolios accordingly. If M&G underperforms, it could see revenues and profits falling.

But I think the opposite is true, too. M&G might actually see business grow if its investment managers perform better than rivals at other firms. The company began this year promisingly, reporting net inflows of client funds. It is also currently buying back up to £500m of its own shares. I see that as a sign of management confidence in the financial health of the business and would consider buying its shares for my portfolio.

Henderson Far East Income

The pandemic and government regulations continue to hamper business in some key Asian markets. That could explain why the Henderson Far East Income (LSE: HFEL) investment trust has seen its share price fall by 7.9% over the past year.

Coincidentally, 7.9% is also the current dividend yield. Put like that, this might not seem like much of an investment – an attractive dividend only covering the capital loss. But that is based on the past 12 months – what about the future? I think the trust’s exposure to Asian companies could help its performance in coming years. A mixture of pent-up customer demand and long-term growth trends could mean that it benefits from Asian economic expansion in coming years.

The trust pays dividends quarterly and has raised its payout annually in recent years, although that is no guarantee that it will continue to do so. But its investment focus means that the trust managers are focussed on the sorts of holdings they think could provide strong income streams.

One risk with an income fund is that managers chase yield, which can lead to them making some poor long-term investment choices. The trust’s five-year track record is not reassuring in this regard, with the shares having lost 18% in value. Set against this are two things.

First, the income has been and remains substantial – if my focus was on inflation-busting income then the share price movement would not bother me too much if I felt the long-term potential of its portfolio remained strong. Secondly, I think the weak recent share price performance reflects ongoing nervousness in parts of the Asian economy. If that turns out to be correct, the trust’s current share price could be a buying opportunity for my portfolio.

Final thoughts

These three shares all have dividend yields higher than the current rate of inflation. But things can change. Inflation could keep getting higher. Meanwhile, inflationary pressures might hurt business performance and lead to dividend cuts.

But I think these shares could be a good fit for my portfolio because each of them has the potential for strong profits in coming years. In different ways, each could turn a wider economic challenge into a business opportunity. Imperial can use its pricing power, M&G could benefit from financial services customers looking for a new investment manager, and Henderson Far East Income could ride on the coattails of Asian economic growth.

It means I am looking for corporations paying attractive dividends that they can afford without having to take on debt or skimp on reinvesting back into the business. 

With that in mind, here are three passive income shares I would buy today, all of which yield more than 7%. 

Trading income 

The first company is the financial services group Plus500 (LSE: PLUS). This firm generates revenue from traders who place deals on its platforms. By taking a tiny slice off each trade, the enterprise is able to generate significant profits and hefty profit margins. As part of this model, profits tend to rise during periods of market volatility and fall when traders are sitting on their hands. 

This means it has the capacity to produce significant dividends for investors. At the time of writing, the stock offers a dividend yield of 7%, although it could vary going forward. Indeed, the company has a track record of returning more cash to investors when profits are rising and less during periods of declining sales. 

Some challenges the group may face include competition and regulations. These could hurt its profit margins and lead to reduced shareholder returns. 

Passive income diversification 

Henderson Far East Income (LSE: HFEL) presents a way for me to build exposure to a diverse portfolio of income investments across Asia. 

I think this strategy makes a lot of sense for my portfolio, as it will help me build exposure to different regions of the world and diverse businesses.

At the time of writing, the trust offers investors a dividend yield of 7.9%. This is backed up by income from its top holdings, including Bank of China, Samsung Electronics and Taiwan Semiconductor. 

One significant benefit of dividend investing with income trusts is they can manage their payouts. Trusts can hold back a quarter of their income every year to build a revenue reserve. These companies can then use this to cover their dividends to investors if the holdings in the portfolio cut their payouts. As a result, investors are insulated from individual business actions to a certain degree. 

A downside of this approach is that funds can charge high management fees. These can eat away at returns in the long run.

Growing business 

Jupiter Fund Management (LSE: JUP) is my final passive income buy. Over the past five years, this firm has built a niche in the fund management industry. Thanks to its strong reputation with customers, assets under management recently hit a record high. 

As assets under management have expanded, so have management fees. This generates a steady stream of income for the company, which it can then return to investors. At the time of writing, the stock offers a dividend yield of 7%. There is room for growth in the years ahead as assets under management continue to build. 

Some risks that could hold back growth include completion from larger peers. A price war in the fund management sector could drive down Jupiter’s profits. An increased regulatory burden may also impact the company’s profit margins.

Here are two investment trusts that could help you build your nest egg. They will also produce a growing, passive income stream in retirement.

City of London Investment Trust

The City of London Investment Trust (LSE: CTY) is as close to investment trust royalty as you can get, growing investors wealth since 1891. City of London is one of the best income investment trusts around. The portfolio is made up of FTSE 100 companies and management is focused on providing long-term growth in income and capital.

These objectives make the trust an excellent pick for investors who want to protect and grow their capital over the long term. Over the past 10 years, the trust has returned 177%, outperforming its benchmark by around 45%. It has achieved this by investing in high-quality FTSE 100 income stocks.

City of London smashed its benchmark over the past decade without charging its investors the earth. The current ongoing annual management fee is just 0.39%, while most UK equity income funds charge around 1% per annum. The stock currently supports a dividend yield of 4.3%. It’s trading at a slight premium to net asset value of 1.5%.

Henderson Far East Income Ltd

City of London is focused on finding high-quality income stocks in the FTSE 100. Meanwhile, Henderson Far East Income (LSE: HFEL) as its name suggests, looks for income overseas. The primary advantage the company has over its domestic-focused peers is its broad mandate.

It can invest anywhere across the Asia-Pacific region, giving the trust a vast pond to fish for income stocks. As such, it should come as no surprise the stock offers a higher dividend yield than most companies in the UK.

At the time of writing, the annual dividend yield is 6.2%. The trust is also trading at a slight premium to the net asset value. The premium sits at 1.9%, which is around the 12-month average. So, it’s clear investors have always been willing to pay a premium to get their hands on the trust’s attractive income stream.

The most substantial holdings in the portfolio include Korean infrastructure group Macquarie Korea Infrastructure, Chinese liquor company Kweichow Moutai Co Ltd, which is one of the oldest businesses in the world. And finally, China Yangtze Power Co Ltd.

As well as Chinese stocks, the trust also has extensive exposure to Australia, Singapore, Hong Kong and New Zealand. This gives it a diversified portfolio that should continue to produce a steady yield for investors for many decades to come.

Cash ISAs are often recommended as a relatively safe place to park your hard-earned cash. But even the best easy-access accounts only offer a paltry 1.4% return a year. £10,000 parked in the best-performing Cash ISA would yield just £140 in its first year.

Interest at these levels adds only a couple of pounds a year to your compound multiplier. If rates drop further as they have done in the eurozone, your returns will be even smaller.

High yield

But there is a way to get higher returns without too much effort. Just like a Cash ISA, with a Stocks and Shares ISA, you get any capital gains or dividends tax-free.

If you made the choice to put your ISA money into a 6% yielding trust instead of cash, you would be £460 richer at the end of year one.

In the second year, your investment you would make you £636 (£10,600 x 0.6). After five years, your initial £10,000 turns into £13,382.25, adding £757.49 across the 12 months.

At a consistent 6% yield, over 10 years this single investment would add £17,908.48 to your pension pot. Such are the incredible gains to be had reinvesting high-yield dividends boosted by the power of compound interest. 

By my calculations, over the same period, with your money wasting away in a 1.4% inflation-lagging Cash ISA you would be £6,416.90 worse off.

Diversify

Where would I put my money if I was buying into a trust? Well first, it is worth noting that FTSE Russell, which runs the London Stock Exchange, has an interesting piece of research showing that over the last 12 years, pension funds heavily skewed their portfolios to domestic stocks and shares. We’ve all heard how important it is to diversify our holdings, but it’s interesting to note that the largest asset managers are very focused on buying UK companies.

This could be a mistake as the findings show that “maintaining a home bias in asset allocations has been extremely costly” for UK investors.

I think buying shares in a trust that owns the best-of-the-best in terms of overseas assets is a relatively low-risk way to diversify your portfolio while still bringing in market-beating returns.

Henderson Far East Income

The LSE’s Henderson Far East Income (LSE:HFEL) is returning upwards of a 6% yield from its collection of Chinese, Korean and Taiwanese real estate, financial, tech and digital companies.

There is a wide geographical and sector spread, with the largest holdings being the world’s biggest semiconductor foundry Taiwan Semiconductor Manufacturing Co, Beijing-based utilities firm China Yangtze Power, and Hong Kong telecommunications giant HKT Trust, which currently turns over £3.2bn a year.

In the last 12 months, investors have paid an average 1.84% premium to buy shares in the HEFL trust compared to the net asset value (NAV) of the £515m in stocks it holds. Such is the support for this product. At time of writing that premium is around 2.2% so waiting for a dip may pay off long term.

It’s your money. It’s your choice. But by seeing the value in spreading your portfolio net a little wider, effectively with the flick of a switch and trust in the power of compounding, you could make yourself thousands of pounds better off. I know what I’d do.

This tiny amount of income does not even beat inflation, and with that being the case, I think now could be the time to dump your Cash ISA and invest in investment trusts instead.

The great thing about investment trusts is that they are companies in their own right, and there is no obligation for them to pay out dividends received from their portfolios to shareholders. 

This means trusts can hold some money back in the boom years, to maintain payouts in the lean times. This flexibility has helped some trust achieve dividend track records of as long as five decades.

Record-holder

The City of London (LSE: CTY) has one of the most impressive dividend records of any investment trust. It has been paying and increasing its distribution for 53 years now. 

Managed by Job Curtis, who has been running the fund since 1991, City of London’s portfolio is dominated by high-quality blue-chip stocks. For the 10 years to the end of September 2019, the trust produced a total return for investors of 177.7%, outperforming its benchmark by 45.3%. 

The company owns 97 holdings in its portfolio and charges just 0.39% per annum in fees. That’s nearly half of what Neil Woodford was charging for his flagship Equity Income Fund.

At the time of writing, City of London supports a dividend yield of 4.5% and trades at a slight premium of 3.2% to net asset value.

Multi-manager

Shires Income (LSE: SHRS) is my next income investment trust pick. Unlike City of London, this company invests in other managers as well as fixed income securities and traditional equities. 

The top holding in the portfolio is the Aberdeen Smaller Companies Income Trust, and the next four holdings are all high-yield preference shares. Around 30% of the portfolio is allocated to fixed income. 

This focus on high-yield securities means Shires offers more in the way of income for investors.

At the time of writing, shares in the company offer a dividend yield of 5%. It charges an annual management fee of around 1% with all costs included, and currently trades at a discount to net asset value of 1%.

Emerging income 

The final investment trust that I’m going to profile is the Henderson Far East Income Trust (LSE: HFEL).

With a dividend yield of 6.2% at the time of writing, this trust supports the highest yield in this piece. It is currently trading at a premium to net asset value of 1.5% and charges an annual management fee of 1.1%. 

Launched in May 1930, the goal of the Far East Income trust is to provide shareholders with a growing annual dividend and capital appreciation from a portfolio of investments across the Asia-Pacific region.

Top holdings include Macquarie Korea Infrastructure Ord and China Construction Bank. So, if you are looking to diversify your portfolio away from the risk of Brexit, this company might be the perfect vehicle to do so.

Around a quarter of the portfolio is invested in Chinese stocks, with a further 17% in Australian shares and 13% in Singapore-listed equities. The trust’s performance over the past 10 years has been highly impressive. Including dividends paid to investors, the share price has produced a total return of 127%.

I already hold two dividend-paying investment trusts within the account. These are the City of London Investment Trust and the Murray Income Trust. Both have excellent yields and long-term dividend-growth track records.

However, I also have my eye on several others that pay big dividends. Here’s a look at two I’m keen to add to my ISA.

Henderson Far East Income

I’m quite bullish on the long-term growth prospects of China. The country has the world’s largest population at 1.4bn and is already the second-largest economy in the world. Yet my portfolio is underexposed to this economic powerhouse at present. For this reason, I’m considering a position in the Henderson Far East Income (LSE: HFEL) trust.

This trust aims to provide a high level of dividend as well as capital appreciation from a diversified portfolio of investments traded on the Pacific, Australasian, Japanese and Indian stock markets.

With a 30% weighting to China, the trust appears to be an excellent way to gain exposure to the world’s second-largest economy, as well as exposure to other fast-growing countries such as South Korea and Taiwan. The top three sector weightings within the trust are financials, oil & gas and technology and the top three holdings are currently Samsung Electronics, China Construction Bank and Agricultural Bank of China.

The dividend yield on offer from the Henderson Far East Income trust looks very attractive. For 2017, the payout was 20.8p per share, which equates to a yield of 5.7% at present. It’s also worth noting that the dividend has been increased for 10 consecutive years now, an excellent achievement. I think this trust could be an excellent addition to my ISA, given its high yield and geographical diversification benefits.

Merchants Investment Trust

Turning back to the UK, another high-yielding investment trust I’m considering is the Merchants Investment Trust (LSE: MRCH).

This trust mainly invests in large FTSE 100 companies with the aim of providing its shareholders with an ‘above-average’ level of income and income growth, as well as long-term capital growth.

Looking at the top holdings, there are plenty of familiar names within the portfolio. For example, Royal Dutch Shell is the top holding with a portfolio weighting of 7.5%, followed by GlaxoSmithKline (6.2%), BP (5.2%) and HSBC Holdings (4.9%). In other words, an investment in this trust provides exposure to some of the largest, blue-chip companies listed in the UK.

The dividend yield here is also very attractive. For 2017, investors received 24.2p per share, which at the current share price of 465p, is a yield of 5.2%. Impressively, the payout has been increased for 35 consecutive years now. With a low ongoing charge of just 0.63%, the Merchants Investment Trust appears to be an excellent choice for UK income investors.

Faster dividend growth

Looking ahead, it seems set to benefit from the more constructive outlook for emerging market economies in 2018, which is likely to drive further gains for emerging market equities. Asian markets are particularly promising, with recent GDP growth forecasts revised upwards for both China and India.

What’s more, Fund manager Michael Kerley reckons Asian companies have a greater potential to grow their dividends than those from other regions because, on the whole, they have been generating more cash than is being used for new investments. This ‘excess’ cash leaves room for increased shareholder payouts going forward.

Additionally, he believes current dividend payout ratios in Asia are relatively low compared to companies from other regions, meaning there’s greater scope for dividend growth than elsewhere.

Value focus

Kerley uses a value driven approach, with a preference for companies that generate reliable and growing cash flow, in order to deliver a portfolio of high quality Asia Pacific equities that generate high and sustainable dividends. As such, I reckon this fund may be considered by income investors as a potential alternative source of equity income to UK-focused equity funds, thereby allowing investors to diversify geographically and potentially to reduce risk.

Over the past five years, the fund has delivered a total net asset value (NAV) return of 53.3%, with dividends per share growing by an annualised rate of 4.1%.

Private equity

Another area worth considering for investors seeking income and growth is private equity. It has been one of the best-performing alternative asset classes in recent years, but retail investors seldom get much exposure to the asset class because it’s largely closed off to them. Thankfully, investment trusts, such as NB Private Equity Partners (LSE: NBPE) enable us to gain access to this market, which is under-tapped by retail investors.

There are many reasons for investing in private equity, not least the fact that there are many more unlisted companies than publicly listed ones, so there is a broader investment universe to benefit from. Other reasons include the historical outperformance in returns against equities, better active management opportunities and diversification advantages.

Lower charges

But what sets NB Private Equity Partners apart from many such investment trusts is that a majority of its assets, by value, is invested directly into private-equity backed companies. This is unlike most other peer businesses, such as the Standard Life Private Equity Trust, which use a ‘fund of funds’ approach that adds an extra layer of cost.

As a result, NB Private Equity Partners has lower all-in costs to investors than most listed private equity investment vehicles.

Another attraction for prospective investors right now is that shares in the investment trust currently trade at a sizeable discount to its NAV. With shares in the trust currently trading at a 16% discount to its NAV, there may be additional scope for upside should the discount narrow in the future.

Shares in the investment trust currently support a dividend yield of 3.5%.