To me, one UK dividend stock stands out from the crowd – one that’s delivered 48 consecutive years of annual dividend increases to its shareholders!

Safety in numbers

The Scottish American Investment Company (LSE:SAIN) is an investment trust run by Scottish investment house Baillie Gifford. Its objective is to grow its dividend at a faster rate than inflation through increasing capital and growing income. The £872m trust has delivered a total return of 65% over the past five years and has a dividend yield of 2.7%.

The vast majority of its assets are in global shares, though income is also received from bonds, property, infrastructure and other asset types. The portfolio contains around 65 companies, including household names such as Microsoft and PepsiCo. Its largest holding is Novo Nordisk, the Danish pharmaceutical giant, which currently makes up 3.5% of assets.

I like the safety such diversity provides, not just in terms of different companies but also different assets. More than this, though, I like the trust’s remarkable record of raising dividends above the rate of inflation. 

Proven resilience

There have been no dividend reductions by The Scottish American Investment Company in the past 80 years. During this time, there has been World War II, the Suez and Cuban Missile crises, multiple recessions and bubbles, various periods of high inflation, and now even a global pandemic. This level of resilience was again proven in 2020 when, despite a collapse in global dividends brought about by Covid-19, the trust was able to increase payments to its shareholders by 1%.

In its most recent update, the trust declared a second interim dividend of 3.40p per share. This is 10.6% higher than the equivalent dividend paid last year, which provides shareholders with income above the UK’s current 9% rate of inflation.

Opportunity cost

That being said, a dividend yield of 2.7% doesn’t sound that sexy compared  to some of the higher yields out there in the market right now. For example, the BP dividend yield – even after a very strong increase in the share price over the past year – currently stands at 4.25%. So there is a risk of opportunity cost here, where I’m sacrificing potentially much higher yields elsewhere for the safety and resilience of the dividend paid by The Scottish American Investment Company.

However, I’m happy to sacrifice those higher yields in favour of investing in a trust that has delivered nearly half a century of rising dividends.

Here, I’m going to highlight two of my favourite Dividend Heroes. If I was looking to generate passive income from the stock market today, I would definitely consider these two investment trusts for my portfolio.

Scottish American Investment Company

Let’s start with Baillie Gifford’s Scottish American Investment Company (LSE: SAIN). This is a global product that aims to be a ‘core investment’ for private investors seeking income. It predominantly invests in equities but also allocates capital to bonds, property, and other asset classes.

One thing I like about this particular Dividend Hero is that its portfolio is highly diversified. At the end of January, over 45% of the portfolio was allocated to European and Asian stocks. These two areas of the market are often neglected by UK investors.

I also like the kind of stocks this trust holds. At 31 January, the top 10 holdings included Big Tech giant Microsoft, healthcare specialist Novo Nordisk, and consumer goods powerhouse PepsiCo. These are world-class companies.

Now, the dividend yield here isn’t that high. Currently, it’s only about 2.4%. However, I’m not too fussed about this as the trust has a great track record when it comes to delivering high total returns (capital gains plus dividends). For the five years to the end of 2021, for example, its share price rose 93%. This means that total returns over that period were more than 15% per year.

It’s also worth noting that the trust has now registered 47 consecutive dividend increases.

Of course, past returns are not an indicator of future performance. There’s no guarantee this trust will provide good returns going forward. However, I see it as a great pick for passive income as part of a balanced investment portfolio. Ongoing charges are 0.70% per year.

Murray Income Trust

Another of my favourite Dividend Heroes is Murray Income Trust (LSE: MUT). This trust, which is managed by Abrdn and has now posted 48 consecutive dividend increases, aims to provide high and growing income along with some capital growth. It mainly invests in UK shares but has a little bit of exposure to international stocks. Top holdings at the end of January included Diageo, AstraZeneca, and RELX.

This trust also has a pretty good track record when it comes to performance. For the five years to the end of 2021, for example, it generated a share price return of 57%. That’s a solid return for a UK-equity product. By contrast, the FTSE All-Share index delivered a return of just 30% over that period.

As for the dividend payout, this is very appealing, in my view. Last year, MUT paid out income of 34.5p per share. At the current share price, that equates to a yield of about 4.1%. I’d be happy with that yield if my goal was to generate passive income. Dividends are paid quarterly too, which is handy.

It’s worth pointing out that dividends from investment trusts are never guaranteed. If the stocks owned by MUT reduced their dividends, the trust may have to reduce its payout too.

I’m comfortable with this risk though. Overall, I see MUT as a very solid product for passive income. Ongoing charges are 0.46% per year.

Here, I’m going to highlight five top investment trusts I like for 2022. I’d be comfortable buying all of them for my own portfolio today.

Scottish Mortgage Investment Trust

Starting with investment trusts for growth, one of my top picks here is Scottish Mortgage Investment Trust (LSE: SMT). This is a global equity product that’s managed by Baillie Gifford. It has a phenomenal track record (its share price is up around 333% over the last five years).

There are a number of things I like about Scottish Mortgage. One is that it provides exposure to some of the world’s largest tech companies. Top holdings currently include Tesla, Tencent, and Nvidia. Another is that it provides exposure to unlisted companies, such as payments firm Stripe and tech platform ByteDance. Normally, three kinds of unlisted companies are only accessible to sophisticated investors through venture capital funds.

Now this is a higher-risk investment trust. That’s because it owns a lot of high-growth companies which aren’t yet profitable. If these kinds of companies fall out of favour in 2022, SMT could underperform. So I wouldn’t want to have too much portfolio exposure here. All things considered however, I think it’s a top investment trust for long-term growth. Fees are very low, at 0.34% per year.

Smithson Investment Trust

Another growth-focused investment trust I like is Smithson (LSE: SSON). This is a mid-cap/small-cap product that’s managed by Fundsmith. Since its launch in 2018, it has performed very well, returning 23% per year to the end of November. 

What I like about this trust is that, like its big brother Fundsmith Equity, it aims to invest in high-quality businesses that are dominant in their markets and have established excellent track records. This approach has delivered excellent returns for Fundsmith Equity over the long run and seems to be working for Smithson too.

I also like the fact it provides exposure to growth stocks that are more under the radar. Top holdings at the end of November, for example, included Rightmove, Fevertree Drinks, and Equifax.

One risk here is that the trust is quite concentrated. It only holds between 25 and 40 stocks which means that stock-specific risk could be relatively high compared to other more diversified trusts. I’m comfortable with this risk however, as I have plenty of other trusts, funds, and stocks in my portfolio. Fees here are 0.9% per year.

Allianz Technology Trust

My third pick for growth is the Allianz Technology Trust (LSE: ATT). This trust, which also has a five-star rating from Morningstar, is more niche in nature as it is focused purely on technology stocks.

One reason I like this trust is that it provides exposure to a broad mix of tech stocks. Not only does it hold the mega-cap tech giants such as Microsoft and Alphabet but it also holds smaller, up-and-coming players such as Okta and Snowflake.

I also like the fact that the trust is managed by the highly experienced AllianzGI Global Technology team, which is based in San Francisco. This location is only a stone’s throw from Silicon Valley, where many of the world’s top tech companies are based.

Of course, if technology stocks underperform in 2022, this trust is likely to underperform as well. So, I wouldn’t want to have too much portfolio exposure here. I think it could play a role in my diversified portfolio though. Fees are 0.8% per year.

Scottish American Investment Company

Turning to investment trusts for income, one of my top picks is Scottish American Investment Company (LSE: SAIN). This is a global equity product that’s also managed by Baillie Gifford. Its aim is to be a core investment for private investors seeking income. It has an excellent performance track record.

One reason I like this trust is that it has a very balanced portfolio. Unlike many other global equity trusts, it doesn’t have a huge US bias. At the end of November, around 33% of the portfolio was invested in US stocks, while 32% was invested in European stocks and 15% in Asian stocks. Top holdings at 30 November included Microsoft, Novo Nordisk, and Roche.

Now this trust doesn’t have a huge dividend yield. At present, it’s around 2.4%. However, it is a ‘Dividend Hero’, which means it has increased its dividend every year for at least 20 years.

One risk here is that the trust does hold quite a few growth stocks. This means that during market volatility, it could be more volatile than some other income-focused investment trusts. However, I see it as a good choice as part of a diversified portfolio. Ongoing charges are 0.7% per year.

Murray Income Trust 

Finally, I also like the Murray Income Trust (LSE: MUT). This is another investment trust that’s focused on income. Its goal is to provide high and growing income with some capital growth by investing predominantly in UK shares. It’s managed by Aberdeen Standard Investments.

Like Scottish American, this trust is also a dividend hero, with a great long-term dividend growth track record. In 2021, total dividends amounted to 34.50p per share, which equates to a yield of nearly 4% at the current share price. 

It’s not just the dividend track record that is impressive here however. Overall, recent returns have been very good as well. Over the five years to the end of November, MUT’s net asset value (NAV) rose 49%. By contrast, the FTSE All-Share Index returned 31% over the same period. Performance has been boosted by stocks such as Diageo, AstraZeneca, and Safestore, which are among the top holdings.

It’s worth pointing out that while this trust has an excellent long-term dividend track record, dividends are never guaranteed. It’s also worth noting that at times in the past, this trust has underperformed the market, due its focus on dividend payers. Overall however, there’s a lot to like about Murray Income Trust, in my view. Ongoing charges are 0.46% per year.

Here, I’m going to highlight two investment trusts I’d buy for income. Both pay investors regular dividends and have delivered strong total returns (capital gains and income) over the long run.

A top UK investment trust for income

One of my top picks for income is the Murray Income Trust (LSE:MUT). Its aim is to provide high and growing income with some capital growth by investing mainly in UK shares. The trust, which is managed by Aberdeen Standard Investments, has a 5-star rating from research group Morningstar.

Murray Income Trust is classified as a ‘Dividend Hero’. This means it’s increased its dividend payout every year for at least 20 years. Last year, it paid out 34.25p per share to investors. At the current share price, that payout equates to a yield of about 3.9%.

It’s not just the yield that’s impressive here. Overall returns have also been very good. Over the five years to the end of May, MUT’s net asset value (NAV) rose 60.1%. By contrast, the FTSE All-Share index returned 40.5% over the same period.

One thing I like about this trust is that it has a balanced portfolio. It’s not just stuffed full of high-yielding stocks. There’s also a nice mix of dividend growth shares, such as Diageo and Unilever, some higher-yield plays, such as BHP and National Grid, as well as some international dividend stocks such, as Coca-Cola.

However, It’s worth pointing out that while MUT has a great dividend track record, dividends aren’t guaranteed. Past performance isn’t an indicator of future returns. At times, this trust has underperformed the market.

Overall though, there’s a lot to like about MUT, in my view. I see it as a great investment trust for income. Ongoing charges are 0.64% per year.

A global focus

Another investment trust I’d buy for income is Baillie Gifford’s Scottish American Investment Company (LSE: SAIN). This trust, which also has a Morningstar 5-star rating, invests globally. It aims to be core for private investors seeking income.

Like MUT, Scottish American is a Dividend Hero. Last year, it paid out 12p per share in dividends. At the current share price, that equates to a yield of 2.4%.

While the yield here may seem a little underwhelming, the total performance of the trust has been very strong in recent years. Over the five years to 31 May, its NAV rose 113.9%, beating the FTSE All-World Index (which returned 103.4%) comfortably.

This trust also has a balanced portfolio. Unlike many other global equity products, it doesn’t have a huge US bias. At end-May, around 30% of the trust was invested in US stocks, while 32% was in European stocks and 15% was in Asian stocks. Some names in the portfolio include Microsoft, Roche, and Procter & Gamble.

It’s worth noting that some of the stocks in this portfolio are more growth-focused. This means that during market turbulence, this trust could be more volatile than some other income-focused investment trusts.

As part of a balanced investment portfolio however, I see it as a good pick for income. Ongoing charges are 0.70% per year.

And with that in mind, here are three income stocks I’d buy for my Stocks and Shares ISA today. 

Income stocks to buy 

The first income stock I’d buy is SSE (LSE: SSE). This utility company is moving to become a renewable energy champion. The firm is looking to invest several billion pounds over the next few years, tripling its renewable energy output by 2030.

Not only should this help build the company’s earnings over the next few years, but it should also future-proof the business and its dividend.

At the time of writing, the stock offers a yield of 5.7%, and it looks to me as if this yield is here to stay as the firm invests for the future. 

The main risk to the dividend is the potential for overspending. If SSE ends up splurging on assets that don’t earn a decent return, the firm may have to cut the payout to fill the hole. 

Even after taking this risk into account, I’d buy the shares today. 

Stocks and Shares ISA buy 

The second company I’d acquire for a portfolio of income stocks is the trust, Scottish American Investment Co (LSE: SAIN). 

This investment firm owns a portfolio of global dividend stocks, including Taiwan Semiconductor Manufacturing and UPS, among others.

What I like about this trust is that as well as income, it targets growth. So, while the company’s 2.5% dividend yield might not be the highest on the market, the potential for capital growth makes up the difference.

The trust has returned 81% over the past five years, excluding dividends, although investors should never use past performance to guide future potential. 

The one downside of this approach is the cost. Scottish American charges an annual fee of 0.7%. Another challenge is the risk that the trust’s investment manager might pick the wrong stocks. This could hurt performance and is probably the biggest challenge of investing in actively managed funds. 

Still, I’d buy the fund for my portfolio, considering its income and growth potential. 

Economic recovery 

The final stock I’d buy for a Stocks and Shares ISA is 3i (LSE: III). This firm has two main business divisions, private equity and infrastructure. The private equity operation focuses on managing assets, mainly other businesses, to produce high returns.

Meanwhile, its infrastructure division owns and operates infrastructure assets intending to produce steady returns.  

I think this combination of businesses is the perfect mix to capitalise on the economic recovery over the next few years. This is the primary reason why I’d buy the income share for my Stocks and Shares ISA. It currently offers a dividend yield of 3.3%, and the stock has the potential to produce some capital growth as well over the next few years. 

3i is also exposed to some unique risks. For example, it may suffer if governments decide to nationalise the group’s infrastructure assets. Another wave of coronavirus could also hurt returns from the private equity business. 

Even after taking these risks into account, I’d still buy right now. 

How I’d invest £10k

A lump sum of £10k is a great starting point to build a sizeable financial nest egg. It’s large enough to create a diversified portfolio without taking on too much risk. Owning just one or two stocks or funds in an investment portfolio, for example, can expose one to a great deal of risk. If only one of these investments starts to struggle, it can have a disproportionate impact on overall performance. 

As such, I think it’s better to own at least five individual funds or a similar amount of stocks in different sectors and industries. I reckon this approach offers the best trade-off between risk and diversification. 

There are a couple of trusts I’d invest in for a portfolio. These include RIT Capital Partners, the Scottish Mortgage investment trust and the Scottish American Investment Company. 

Each of these investment trusts provides something different. RIT is focused on delivering positive returns for investors in all market environments. To this end, the investment trust owns a portfolio of alternative assets such as hedge funds, private equity funds, private businesses and real estate. 

In comparison, Scottish Mortgage prides itself on its ability to find growth companies. It has a tremendous track record of finding growth stocks and riding them to profit.

And finally, Scottish American is focused on finding income and growth stocks. To that end, its portfolio is a bit more conservative than that of Scottish Mortgage, and it offers more in the way of income with a dividend yield of 2.6%. 

The road to £1m

According to my calculations, over the past five years, an equally weighted portfolio of these three investment trusts has produced an annual return of around 20% for investors. 

To make up the balance of the five funds, I’d also invest in two index tracker funds. The FTSE All-Share, which tracks the performance of the largest 600 listed UK corporations. And the S&P 500, which tracks the performance of the 500 largest listed companies in the United States. 

My figures show a portfolio of all the investments listed above would have produced a mid-teens annualised return for investors over the past five years.

At this rate, I reckon it would take just 31 years to turn an investment of £10,000 into £1m. With additional contributions of £200 a month along the way, it may be possible to hit this target in just 25 years, according to my calculations. 

So that’s how I’d invest £10,000 in 2021. Of course, this isn’t the only strategy available. A diversified portfolio of high-quality growth stocks may be able to achieve the same returns over the long term. 

Going for growth

These three aim to deliver a combination of growth and income, to build your wealth while working and deliver income after you have stopped.

Perhaps the most exciting is JP Morgan Global Growth & Income (LSE: JPGI), the best performer on the Global Growth & Income sector measured over 10 years, up 257% in that time, and also over five years, when it returned 91%, according to Citywire. Past performance is no guarantee of future success, but management is clearly doing something right.

Income for sale

This £425m global fund was launched in December 1964 and aims to outperform the MSCI All Country World Index over the long-term with a high conviction portfolio of typically 50-90 stocks, built through research-driven bottom-up stock picking.

The trust aims to pay dividends totalling at least 4% of its net asset value each quarter, and currently yields a generous 3.68%. It trades at a small premium of 0.95%, which is a sign of a fund in demand. Check its top holdings against your own portfolio for clashes: 4.6% of the fund is in Google-owner Alphabet, with other US stocks Microsoft, United Health Group, Pioneer Natural Resources, Union Pacific, Citigroup and Visa figuring strongly.

Global reach

My next tip is another global trust, Invesco Perpetual Select Trust Global Equity Income (LSE: IVPG). Again, it aims to deliver long-term income and capital growth through a globally diversified portfolio of stocks. Launched in 2006 this is a smaller fund with just £68m under management but is another top performer returning 187% over 10 years, and 72% over five.

This is around 35% invested in Europe and also the US, with 18% in the UK, and the remainder in Asia-Pacific and Japan. The top three holdings are Royal Dutch Shell, Chevron and BP, and with Total at number six you are getting plenty of oil exposure. Orange, Pfizer and Nasdaq also feature in the top 10. This offers an attractive yield of 3.25% and trades at a slight discount of -1.08,

Premium fund

Finally, the Scottish play. Although actually, Scottish American Investment Company (LSE: SCAM), managed by Baillie Gifford, is another global fund and this one comes with a truly long-term pedigree, having been launched way back in 1873. Founder William Menzies thought he could offer a better income than the “pitifully low” 3.5% offered by the Bank of England at the time. Now it pays just 3%, although of course these are strange times.

The trust is up 154% over 10 years, and 64% over five. It  also has large exposure to Europe, around 36%, with a smaller US focus at 24%, and a spread of Asia-Pacific and international equities. Top holdings include Deutsche Boerse, Coca-Cola, Johnson & Johnson, Prudential, Hiscox and Microsoft. This is the largest trust of the three with £525m under management. It trades at a premium of 2.02.

Funds like these could even make you a millionaire. There is some crossover, so you may want to pick your favourite and match them with others. Then sit back and let the growth and income flow.

Mark Barnett

In the UK equity space, the Perpetual Income & Growth Investment Trust (LSE: PLI) offers a promising income outlook with a dividend yield of 3.8%.

It’s an investment trust which is run by well-regarded fund manager Mark Barnett. He has been at the helm of the fund for nearly 19 years now, using a long-term, high conviction approach to select stocks. The fund seeks to achieve capital growth and real growth in dividends over the medium-to-long term.

Barnett is a valuation-driven stock picker that reckons attractive opportunities exist in areas which would traditionally be seen as uncorrelated to the wider market and economy. He is bullish on a number of UK domestically-exposed companies and has recently increased the portfolio’s UK domestic exposure via new investments in A J Bell, British Land, Eddie Stobart Logistics, McBride and Secure Income REIT.

Value for money

The trust also stands out for investors seeking good value for money. With shares in the fund trading at a 12% discount to its net asset value (NAV), prospective investors have the chance to buy a stake in the fund’s assets for less than the sum of its parts.

Perpetual Income & Growth’s discounted valuation reflects negative sentiment towards the fund after its recent underperformance against the benchmark FTSE All-Share Index. The fund has been underperforming the market for two consecutive years now, missing out from the commodities-led recovery in the stock market due to its limited exposure to mining stocks and greater domestic focus.

Longer term, however, its track record is still impressive with the fund achieving a cumulative NAV total return of 136% in the 10 years leading to 31 March 2018, against the benchmark’s gain of 91%. What’s more, fund fees are relatively low, with ongoing charges of just 0.7% last year, marking it out as an attractive core investment position.

Track record

The Scottish American Investment Company (LSE: SCAM) is another good option for investors seeking steady income growth. In the global equity income space, the fund has one of the longest track records for raising its annual dividends, with 37 consecutive years under its belt.

The trust is one of the oldest investment trust companies still in existence, dating back all the way to 1873, although it has since undergone significant changes in terms of its investment strategy and management. Its current aim is to grow its dividends at a faster rate than inflation by increasing capital and growing income.

Its portfolio is merely globally diversified, but also has exposure towards other asset types, such as bonds and property. Equities still account for 80.1% of total assets, and the trust’s largest stock holdings include Deutsche Boerse (2.1%), ANTA Sports Products (2.0%), Coca Cola (1.9%), CH Robinson (1.9%) and Prudential (1.9%). UK property investments account for a further 14.9%, while fixed income represents 5% of its assets.

Scottish American provides a dividend yield of 3%, with shares trading at a slight premium to NAV of 4%.

Their closed-ended structure means an investment trust’s performance is unaffected by asset flows, enabling it to invest in some illiquid asset classes and emboldening management to take a longer-term view. As such, investment trusts have often performed better compared to unit trusts and other collective, or pooled, investments.

And when it comes to finding reliable, steadily growing streams of income, the investment trust sector has a long and proud history of dividend growth. This is helped by the fact that investment trusts can hold back some of the dividend income they earn, allowing them to supplement dividend payments to shareholders in leaner years — something unit trusts and other open-ended funds cannot do. As a result, there are now more than 20 funds that have increased their dividends for 20 or more consecutive years, according to data from the AIC.

UK equity income

JPMorgan Claverhouse Investment Trust (LSE: JCH) is one such fund, with 44 years of consecutive dividend increases under its belt. It aims to provide a combination of capital and income growth from a portfolio consisting mostly of UK stocks.

The company aims to hold between 60 and 80 individual equities in which the fund manager has high conviction, with the flexibility to invest across the breadth of the UK equity market. Large-caps such as Royal Dutch Shell (7.5%), HSBC (6.6%) and British American Tobacco (5.3%) dominate its top 10 holdings, but its portfolio is noticeably overweight on mid-caps Electrocomponents (2%), Synthomer (1.9%) and Fevertree Drinks (1.7%).

Sector-wise, the trust has the largest exposure to financials (28.5%), consumer goods (17.6%) and industrials (13.3%).

Dividends are paid quarterly, with the total paid last year amounting to 24.5p, giving its shares a healthy yield of 3.4%. Fees are reasonable too, with ongoing charges estimated to total 0.76% over the past year.

Global diversification

Another investment trust worth a closer look is The Scottish American Investment Company (LSE: SCAM). With 37 years of consecutive annual increase in shareholder payouts, this fund has a slightly shorter track record of income growth; however I reckon this is made up for by its superior recent performance and its more diversified investment strategy.

Although the focus of its portfolio is on global equities, the company also owns fixed-interest and direct property investments, which represent 5.8% and 13.8% of its portfolio value, respectively. European equities represent its single biggest weighting, accounting for 35.3% of its portfolio, and this is followed by North American stocks, which account for a further 23.6%.

Historic performance figures for the past three years are encouraging as shares in the fund delivered a total return of 64%, significantly beating Claverhouse’s performance of just 32%.

On the downside, shares in The Scottish American Investment Company trade at a slight premium to its net asset value of 7%, against Claverhouse’s current discount of 3%.

Shares in the company currently yield 3%, with ongoing charges of 0.87%.