The beauty lies in the dividend yields. If we buy when share prices are low, dividend yields are higher. And we get the benefit of that higher yield every single year we hold the shares we buy. Right now, I see so many opportunities it’s hard to choose which shares to buy. But I’ll try.

I’m going to pick a company from the FTSE 100, one from the FTSE 250, and an investment trust.

Bank on insurance

The Legal & General (LSE: LGEN) share price has dipped 20% since January’s peak.

I actually think that’s reasonably resilient, with the financial sector hard hit this year. The fall puts the shares on a forward price-to-earnings (P/E) ratio of 7.5. That’s about half the current FTSE 100 average.

And while I expect financial stocks to fall below average, I reckon that’s too cheap. It’s surely because of the uncertainty that insurers face during tough times, and the risk is genuine.

But, more importantly, the forward dividend yield for 2022 stands at nearly 8%. And it rises above 8.5% on 2024 forecasts. These are very uncertain times, and these yields are far from guaranteed. But I rate Legal & General among today’s best FTSE 100 shares for investors to buy.

Houses are safe, right?

The FTSE 250 is awash with fat financial sector dividends. But for diversification, I’m picking housebuilder Bellway (LSE: BWY), whose share price looks like this.

That slide has dropped the P/E down as low as six, and pushed the forecast dividend yield up as high as 6.3%.

Investors are clearly expecting the housing market to take a hit from rising interest rates. And house moves will presumably be put on hold too. Or will they?

For the four months to 5 June, Bellway reported strong sales demand. And if we switch to Persimmon‘s first-half update to 30 June, we see rising forward sales and increasing gross margins.

There is a very real risk that a prolonged economic downturn could hurt our housebuilders. But Bellway’s dividend looks attractive to me for long-term income.

An income hero

Merchants Trust (LSE: MRCH) is an investment trust targeting UK equity income. It’s share price has held up over the past year, but it’s been dipping these past couple of months.

The dividend yield is only a relatively modest 5%. But it has a couple of advantages that I think elevate it above some of its peers. Merchants makes the list of Dividend Heroes put together by the Association of Investment Companies, having raised its dividend every year for 40 years in a row.

The trust also aims to provide long-term capital growth, to add to its income potential.

Should its long run of dividend rises miss a beat, I could see the share price being hit. But, to me, Dividend Hero equals income hero.

Here, I’m looking at three investment trusts I think could make great buys for investors who have a long-term horizon.

Merchants Trust

Merchants Trust (LSE: MRCH) is one of the many investment trusts targeting UK equity income. It’s on a forecast dividend yield of 5%, having lifted its annual payment every year for the past 40 years.

The trust pays its dividends quarterly. So it might be a good one for investors who are drawing down an income to contribute towards their living costs. I’m still a net buyer of shares, but it’s a factor I will consider in the future.

Can Merchants Trust keep its dividend growing for the next 40 years? It holds some top long-term cash cows, including British American Tobacco, Imperial Brands and BAE Systems. So I’m optimistic.

There is risk though. What if tobacco finally goes out of fashion in the coming years? It also holds GSK, formerly known as GlaxoSmithKline, whose dividend is only weakly covered. And GSK earnings have dipped in the past couple of years.

Lindsell Train

Lindsell Train Investment Trust (LSE: LTI) is partly managed by Nick Train, who has built a positive reputation among private investors.

The structure might seem slightly strange, in that a little over 40% of its funds are in Lindsell Train Limited. That’s the company that runs the trust, plus other investments in a number of global companies.

But it does give investors a way to own a portion of the parent company’s other investments without it having to be an investment trust itself.

A few years back, the trust’s shares soared to a premium of 90% over asset value. And investors paying nearly twice as much as the underlying assets were worth was rather bizarre at best. That bubble burst, and the shares are now on a very small discount of 0.25%.

What’s the main risk? I think it’s the unusual holding structure, which could present volatility through uncertainty.

Scottish Mortgage

I have to include Scottish Mortgage Investment Trust (LSE: SMT), which has fallen 42% over the past 12 months. The drop is down to a bear market in US technology stocks, which the trust invests in heavily.

Its top 10 investments include Moderna, Illumina, ASML, and others whose share prices have slumped. The Nasdaq itself, which is actually home to a wider rage of companies, is is down 25% in 12 months.

I think US tech stocks had been getting a bit overheated, and I welcome the correction. The danger is that the run on tech shares might not be over. If it continues, the Scottish Mortgage share price could surely fall further.

Still, the trust is trading on a 15% discount to net asset value now. So there’s a bit of a safety buffer there.

39 years of dividend growth

Merchants Trust (LSE: MRCH) offers a 4.9% dividend yield and has increased its dividend for 39 consecutive years. The trust typically invests in large FTSE 100 companies which pay regular dividends. Top holdings at the end of November included GlaxoSmithKline, British American Tobacco and National Grid.

This conservative strategy isn’t likely to win any medals for rapid growth. But Merchants’ managers are able to boost their returns by using debt to buy shares. This has worked well recently — Merchants Trust’s share price rose by more than 20% in 2021, compared to less than 15% for the FTSE 100.

Using debt adds risk, as it can increase losses during a market crash. Another risk I can see is that GlaxoSmithKline, the trust’s largest holding, is planning to cut its payout next year.

However, Merchants Trust has experienced managers and a long track record. I’d be happy to park some of my cash in this trust in 2022.

Solar-powered dividends

My next pick is renewable energy stock Foresight Solar Fund (LSE: FSFL). Despite its name, Foresight is also an investment trust.

Foresight listed on the London Stock Exchange in 2013, making it one of the older renewable stocks on the market. As its name suggests, it generates the majority of its income from investments in solar power assets. These have a total capacity of over 1GW.

The UK is obviously not the most attractive location for solar power, but Foresight isn’t limited to its home market. The trust also has solar assets in Australia and Spain and is expanding into battery storage.

Foresight shares currently offer a tempting 6.9% dividend yield. The main risk I can see is that, in the future, government subsidies for solar power will gradually be withdrawn. This could leave the trust more exposed to uncertain wholesale electricity prices, putting pressure on the dividend.

For now, Foresight’s 6.9% payout looks safe to me. I’m thinking about adding some to my portfolio this year.

This investment trust offers a defensive 5% income

Supermarkets are one of the most defensive businesses in the world, in my view. Whatever else is happening in life, we’ll always need to do regular food shopping.

One investment trust that’s delivered a steady performance in recent years is Supermarket Income REIT (LSE: SUPR). This real estate investment trust specialises in buying supermarket properties and leasing them back to operators such as Tesco and Sainsbury’s.

Leases on big supermarkets are generally long, with clearly-defined payments. For example, it recently acquired a Tesco supermarket with 17 years remaining on its current lease. This means the trust has good visibility of future cash flow — useful for dividends.

A risk I can see here is that the market for supermarket property is quite strong at the moment. Prices are quite high. If interest rates rise, or property prices fall, then I think Supermarket Income REIT’s dividends could come under pressure.

However, the current situation still looks comfortable to me. With a forecast dividend yield of 5% in 2022, I am considering Supermarket Income for my portfolio.

Both make the Association of Investment Companies’ list of Dividend Heroes. They’ve raised their dividends for 55 and 54 years in a row, recently yielding around 5% and 4%, respectively. Here are three more I’m considering.

Contrarian investment trust

I quite like the look of Fidelity Special Values (LSE: FSV) at the moment, with a 3.2% dividend in 2020. That’s not one of the biggest yields around. But it is nicely progressive, having grown by around 25% over the past three years. And with a long-term outlook, I see better value in a relatively modest dividend with a progressive future then I do in a higher yield but with less convincing prospects.

About three-quarters of the trust’s assets are in the UK. The current biggest holding is Legal & General, with Aviva taking the third spot. Royal Dutch Shell is sandwiched in between. The trust is managed with a contrarian approach, and that shows from its big investments in these two depressed sectors – sectors I definitely consider risky now.

Still, a contrarian outlook fits in with my risk profile, and there’s reasonable diversification in the trust’s assets. I’m putting Fidelity Special Values on my list of buy candidates.

Big yield

I can’t overlook Merchants Trust (LSE: MRCH), which produced a dividend yield of 6.2% in 2020. That was a year when earnings were hit by Covid-19 too. And it shows the benefit of investment trusts being able to hold back some cash in better years to keep the dividends going during leaner times.

This trust has lifted its dividend for 39 straight years, so there should be plenty of motivation to keep it going. Merchants has GlaxoSmithKline as its top holding, and I’m upbeat about that. British American Tobacco and Imperial Brands are in the portfolio too. And while they both offer high dividend yields, that might introduce an ethical barrier for some investors.

What’s the downside? Well, we really need to see earnings growth getting back on track. If it doesn’t, and dividend progress falters, we might see investors heading for the door. I think that risk is minimal, though. And I’m bullish.

Global income

I’ll head away from UK-focused trusts now and go for Murray International Trust (LSE: MYI). This one still has around 10% of its cash invested in the UK, but the rest is spread quite widely around the globe. It aims to achieve better than average dividend yields, and to maintain progressive rises ahead of inflation. The trust has been achieving that, providing a yield of 4.8% in 2020.

The international diversification is intriguing. Murray International has Taiwan Semiconductor Manufacturing, which has a NASDAQ listing, as its biggest holding. Unilever is its biggest UK-based holding, and that’s a company I’ve liked for many years (but have never invested in directly).

The risk for me here is international uncertainty. By that I don’t mean just risky economies and volatile exchange rates. I also mean my own lack of understanding of a lot of the companies involved. But I can’t help feeling it might complement my UK-focused investment trust holdings.

An investment trust I own and like

I already own shares in the value-focused investment trust Merchants Trust (LSE: MRCH), which is run by Simon Gergel. The share price has been doing well since inflation concerns took hold, hitting tech and growth stocks harder. The rotation to value, which could persist, along with the reopening of the economy, should keep providing support for the trust’s share price.

To me, many of the top holdings are well positioned to capitalise on the reopening of the economy from the pandemic. By extension therefore, by investing in these companies, Merchants Trust should in theory be able to deliver for investors as its net asset value (NAV) should rise.

The top holdings (those within the top 10 largest investments) best placed to benefit from the recovery, in my opinion are WPP, Vodafone and BP.

Charges are very important and I think Merchants Trust’s are competitive. The trust has an ongoing charge of 0.59%.

The dividend yield on the trust’s shares is 5.2%. It has had to dip into reserves to pay dividends recently, but as its investments start reinstating their dividends, I expect dividend growth could be on the cards. The high yield is the main reason I like the shares right now.

What has it been doing recently?

The latest monthly factsheet shows the trust invested in Duke Royalty recently. It has also taken profits on a few shares that had performed very well. The manager has reduced large positions, such as Tyman, St James’s Place and Man Group, and recycled this money into larger holdings in high-yielding companies, such as National Grid and Vodafone. The trust’s managers deem the latter two to be at attractive valuations.

What has the manager been saying?

Adding to my optimism and enthusiasm for holding Merchants Trust is the upbeat statements coming from the trust’s manager. In the latest factsheet commentary, Gergel said: “Although the UK stock market is closing in on its pre-pandemic levels, it remains one of the cheapest major stock markets….within [it] there remains a high degree of polarisation, enabling us to find many strong businesses, with high dividend yields, trading on attractive valuations.”

The risks with this investment trust

As always there are risks. The trust holds a lot of lowly valued stocks, such as GlaxoSmithKline, which face challenges. In turn, their share prices could suffer and hit the trust’s NAV. The trust also holds a lot of tobacco and oil, so is not ESG-friendly. The manager doesn’t actively screen out companies with poor ESG scores. 

Instead, Merchnats Trust prefers to talk to companies to improve their ESG. Given the shift by other institutional investors to include ESG screening, there is a risk the trust holds too many shares that get left behind. That could hold back the share price performance.

I’m going to keep holding Merchants Trust. With a large position already I won’t add further, but I’d buy otherwise. I’ll hold primarily for the dividend and for the recovery stocks it offers me. 

Indivior share price plummets

The Indivior share price came crashing down today. The company is now worth around £600m; it has a price-to-earnings ratio (P/E) of 6 and earnings per share (EPS) are 13p. Reckitt Benckiser Group (LSE:RB) has submitted a claim against Indivior for over £1bn. The Indivior share price plummeted more than 33% as a result. The two companies de-merged back in 2014, but there was a clause that was never ironed out and now Reckitt wants its dues.

Indivior is claiming it’s not as serious as it sounds, but investors are sceptical. The company already paid $600m in July to resolve fraud charges related to its opioid medication Suboxone. Prior to that it was caught up in a patent battle with Indian pharma firm Dr Reddy’s Laboratories. I will not be rushing to buy shares in Indivior.

Does Reckitt Benckiser look a better buy?

The Reckitt Benckiser share price reached a high of more than £80 per share back in 2017, but since then it’s endured an extremely volatile time. Its low point came in March this year when it was trading around £51, but it then made a spectacular recovery and by July was over £80 a share again. Unfortunately, this was short-lived and today Reckitt is trading under £65 per share.

The FTSE 100 consumer goods giant sells a lot of popular health and hygiene products. But some believe they will be out of favour once the pandemic is behind us. Positive vaccine sentiment has pushed the Reckitt Benckiser share price back down in recent weeks, but its chairman took this opportunity to buy shares. I think this is a good long-term investment and would be happy to buy.

Buying UK shares via an investment trust

Another way to invest in UK shares is to buy shares in an investment trust or fund. Many of the high performing funds and trusts tend to hold US equities and some specialise in specific areas such as renewables, tech, or commodities.

One investment trust that contains several UK shares is the Merchants Trust (LSE:MRCH). Considering some UK businesses have struggled through the pandemic, it’s not a complete surprise that the Merchants Trust hasn’t had a great year either. It has a high exposure to stocks in troubled sectors such as aerospace, travel, and leisure.

The FTSE All-Share constituent has seen its share price slide 25% year-to-date, with considerable volatility in between. After rising on the wave of positive sentiment brought by vaccine news, its share price is slipping again.

The Merchants Trust has a price-to-earnings ratio of 14, earnings per share are 29p and its dividend yield is an impressive 6%. Its estimated net asset value (NAV) is £4.17, which means it’s trading at a 1.5% premium today. Its dividend is attractive, but how well it can recover in the next year remains to be seen. With the pandemic raging on, I’m not yet tempted by these sectors and think there are more attractive investment trusts to put my money in.

Back to 2020. The first three events could perhaps be repeated. But a cash ISA with 5% interest rate? No chance. Around 1.6% would be the best on offer.

So, what’s the alternative? Investing in the stock market. Several UK companies pay a dividend per share owned, and Edward Sheldon examined three leading dividend candidates earlier this month. A different option, however, is the investment trust.

Why investment trusts?

I like the way that investment trusts are structured with an independent board responsible for safeguarding investors’ best interests. Low ongoing charges are usually another key feature, and under current rules they can retain up to 15% of the income that they receive each year, and then use this to sustain dividends in lean years.

Companies that paid large dividends in 2019 have mostly either cut them completely, or vastly reduced them during the Covid-19 pandemic. Crucially, retained capital has allowed investment trusts such as City of London to not only maintain a dividend payment, but increase it for the 54^th year in a row.

Global investment

I love the maxim of Murray International Trust (LSE: MYI), which aims “to achieve an above average dividend yield, with long term growth in dividends and capital ahead of inflation”. This investment trust is currently trading at a small discount, the dividend yield is 5.73%, gained through investing principally in global equities such as Roche and Verizon. Income is paid quarterly, so gives a bedrock for a passive investor.

Managed by Bruce Stout since 2004, the trust has been in existence for over 100 years. Historical performance is strong, but has lagged its benchmark FTSE World over the last few years due to a lack of exposure to tech stocks and a higher than average exposure to the Asia Pacific region. The trust management believe that future dividend and growth opportunities will be found in this market.

UK dominance

For those seeking a stronger UK focus, then Merchants Trust (LSE: MRCH) is worth considering. The share price is substantially down from its high of £5.69, and as a result the yield is an impressive 7.3%. A high exposure to cyclical stock areas such as travel, leisure and aerospace has driven underperformance compared to the wider market. Recent additions to the portfolio have been centered on defensive tobacco stocks via British American Tobacco and Imperial Brands, and telecom stocks (BT and Vodafone). Manager Simon Gergal has committed to a “high and growing yield”, although it remains to be seen if this can be achieved in the current climate. The answer should become clearer as companies begin to reinstate dividends, and given the potential for share price growth as the market recovers post Covid-19, I’m optimistic that Merchants will provide an excellent long term investment.

Although investment trusts can provide yields of 5% plus, it is important to bear in mind that capital is always at risk. Risk can be mitigated through diverse holdings, something that either of these trusts can offer. In my opinion, they would be a good addition to a balanced portfolio.

A quarterly dividend to help with passive income

Merchants Trust (LSE: MRCH) was doing well until Covid-19. This is especially true when you consider that it’s an income-focused trust holding many big names that weren’t flavour of the month. The shares even traded at a premium to their net asset value (NAV). Covid-19 changed this. The shares are now back trading at a small discount of around 3.5% to NAV. Even better for income investors, the dividend yield is over 7%.

The big question is, can this be sustained?

Management are certainly keen to keep the trust’s status as a ‘dividend hero’, a trust that has kept consecutive years of income rises. The trust plans to dip into its savings to protect shareholder payouts this year.

However, this is not sustainable. What is needed is for companies to reinstate their dividends so the trust doesn’t deplete its reserves to pay for the dividend in the short term.

I’m confident this will happen. I would buy Merchants Trust to create a passive income as it holds many dividend-paying companies. The top holdings are GlaxoSmithKline, British American Tobacco, Imperial Brands, BHP Group, and National Grid.

Getting growth from high-flying US tech stocks 

The Bankers (LSE: BNKR) investment trust gives investors something a little different. It has very different holdings than Merchants, with much more of a tilt towards the high-flying, in-favour US tech stocks. Top holdings include Microsoft, Amazon, and Visa.

As a result, the trust has a much lower dividend yield. It currently provides investors with a yield of 2%. The shares in the trust also trade a premium to NAV of around 1.5%. This then is no hidden gem or recovery play. The trust’s shares will need to stay in demand if the share price is to keep going higher.

From a passive income point of view though, it complements Merchants well, as a very different type of trust. The trusts both pay dividends quarterly giving investors a regular cash flow.

I’m pleased to see the Bankers dividend has been rising steadily for the past two decades and I expect this can continue. If the shares fall to a discount to NAV I would be even more tempted to pick some up. It provides both income and growth potential. 

If you wanted to invest directly, companies such as GlaxoSmithKline also pay their dividend quarterly. Biannual dividend payments are far more common. This could also help make sure you can create a passive income while diversifying your investment portfolio.

Professional buying Next shares 

I’ll look first at the high-yielding investment trust Merchants Trust (LSE: MRCH). Its top holdings are GlaxoSmithKline and British American Tobacco, which each account for over 5% of the trust’s value. 

But I’m more interested in what the manager has been actively doing to navigate this current tricky market. It’s clear they’ve been active. A new position in retailer Next was added. The manager commented:

Whilst current trading is under huge pressure from the lockdown and social distancing, Next has reacted in its characteristically decisive way to protect its financial position and reposition for the future. Although the business cancelled its recent dividend, we would expect Next’s historically strong cash flow to recover, in the medium term, and for ordinary and possibly special dividends to resume.

The trust also added to its positions in National Grid and SSE. The manager cited commitments to dividend policies as well as long-term growth in renewables as reasons to add more. 

Adding to an in-favour pharma share

The management of the Murray Income Investment Trust (LSE: MUT) added to their AstraZeneca holding. Although it has a high price-to-earnings ratio, the pharma company has been growing. It has been involved in finding a vaccine for Covid-19, which has lifted the share price even further. Also for a number of years it has built up an impressive drug pipeline. Its focus on oncology has helped boost the shares.

AstraZeneca has a modest dividend yield because of the share price rise. It is a company with growth potential and potential dividend growth as earnings rise. I’m pleased to have held onto it over recent years. This seems like a very sensible investment, although many investors will be put off by how expensive the shares now appear to be. 

Looking for dividend growth 

Lastly, I’ll turn my attention to Troy Income & Growth Trust (LSE: TIGT). It added to its relatively new holding in FTSE 100 testing company Intertek. The manager made no particular mention of why that position was increased, but based on an interview, it appears the reason for investing originally was to find lower-yielding companies with potential for dividend growth. The manager was also specifically looking for high-quality engineering or industrial companies.

So the key lesson that could be gleaned from these examples is that the professionals are increasingly less concerned about the headline dividend yield. As the manager of Troy points out, the big dividends are too concentrated in a handful of companies – often in commodities. Instead, they will accept a lower yield that can be sustained by earnings growth and as a result are less likely to be cut. I’m inclined to follow their example in the hunt for income.

Investing in the UK’s biggest and best

Merchants Trust (LSE: MRCH) aims to provide an above-average level of income, plus income growth and long-term growth of capital by investing mainly in higher-yielding large UK companies. The portfolio holds a host of high-profile companies such as Royal Dutch Shell, GlaxoSmithKline and Barclays. About two-thirds of the trust is invested in the FTSE 100 with a further 25% in the FTSE 250. The rest is divided between small-caps and cash.

The dividend is paid quarterly, which is good if you want to create a passive income ahead of retirement. It means you can invest in more shares or take the cash as income, although the former will help you build a shares portfolio far more quickly, especially if you have no savings. The yield has been pushed down by recent strong share price growth, but still provides over 4%, which is more or less in line with the FTSE 100.

A slow and steady, year-on-year increase in the dividend gives me confidence that it’s ideally placed to generate a passive income to help you retire richer.

That, alongside the ability of investment trusts to hold reserves to see investors through any leaner years, makes them potentially very financially rewarding and probably the cornerstone of a good investment portfolio. This is why I also like the look of this second investment trust. 

Another above-average yielder

Dunedin Income Growth Investment Trust (LSE: DIG) is another one that is yielding over 4%. It also holds a number of the same higher-yielding companies as Merchants Trust, but it has different top holdings, such as Assura, RELX and Diageo. 

Besides the yield, one of the big perks of this investment trust is that it trades at a discount to what it’s actually worth. Good for investors who want to buy up the shares. The discount is 7%, which is only a little less than the 12-month historical average discount that has been nearer 8%. Again, a rise in the share price following the market bounce post-election has contributed to the narrowing of the discount.

Cumulatively over the three years to 30 November 2019, the shares rose by a third and the dividend has been rising year-on-year and is paid quarterly.

Overall I think these investment trusts are ideal for someone approaching the end of their working life who wants to retire better off. They provide diversified access to a large number of larger companies and a generous dividend yield that is often more than the average for the FTSE 100.