Unlike other funds, investment trusts operate as companies. This means they have a level of flexibility regarding how much income they can distribute to investors as dividends. The structure also gives these businesses more flexibility for choosing investments.

Most investment trusts focus on stocks and shares, but some own commercial property, precious metals, private equity, hedge funds and even renewable energy assets. 

Another quirk of the investment trust structure is the ability to hold back a percentage of income every year. This enables investment trusts to hold back revenue in the good times to cover dividend payouts when the going gets tough. This proved extremely helpful in 2020 when many blue-chip companies slashed their dividends. Investment trusts were able to dig into their dividend reserves to cover shareholder payouts.

So, with that in mind, here are two investment trusts I would buy today to retire on a rising, passive income. 

Passive income investments 

There are a handful of investment trusts that have maintained their dividends for several decades. One of these is the City of London Trust (LSE: CTY). This firm prides itself on its dividend track record. It has maintained the distribution to investors since 1966. 

At the time of writing, the trust provides a dividend yield of 5.1%. To cover this income stream, it owns a portfolio of blue-chip income stocks. Some 86% of the portfolio is invested in UK equities, with the remainder spread worldwide to provide a level of diversification. 

As well as targeting a steady stream of income, the trust also aims to achieve a level of capital growth every year. It has been relatively successful on this front, achieving a total return of nearly 100% over the past 10 years. 

As long as the investment management sticks to the strategy that has been so successful over the past decade during the next 10 years, I think City of London could be one of the best investments to own when looking to build a passive income stream. 

Growth and income

With a dividend yield of 6.4% of the time of writing, the Value & Income Trust (LSE: VIN) could be another option for passive income investors like me. 

This trust uses an interesting model to generate income for its shareholders. Some 41% of the portfolio is invested directly in property across the UK. This provides exposure to the asset class and an uncorrelated income stream. The rest of the portfolio is invested in high-quality blue-chip stocks.

As such, investors receive the best of both worlds. Income from high-quality global dividends and a steady stream of income from property here in the UK. 

Unfortunately, due to the pandemic, Value & Income’s exposure to UK property has become a bit of a liability. Investors have dumped the stock as a result. It’s now trading at a discount of 23% to its underlying net asset value. However, I think this could be a great opportunity for long-term investors seeking a passive income to buy up a portfolio of high-quality income-generating assets at a discount. It’s on my watchlist.

Investment trusts

For those on the hunt for reliable income, it may be worth considering investment trusts as a way to get exposure to the stock market. An advantage that investment trusts hold over open-ended funds, such as unit trusts, is their ability to hold back some of the dividend income they earn each year. This enables them to draw down on their reserves to smooth out income payments during more difficult periods.

The Foreign & Colonial Investment Trust (LSE: FRCL) is one such investment trust which has paid a dividend every year since its inception 150 years ago. What’s more, it has also been growing its dividend for 47 consecutive years.

Broad exposure to global markets

The F&C fund is well-balanced and geographically diversified with broad exposure in international markets and across various industries. This one-stop shop approach makes it a potentially attractive core holding for a starter portfolio, or for those investors seeking to increase their portfolio diversification.

With Brexit uncertainty continuing to overhang on UK economic growth, the fund has continued to cut its exposure to domestic stocks. Its portfolio of UK stocks account for less than 5% of its total assets, down from the 29% in 2013.

North America is its biggest geographical exposure, with 34% invested there. This is followed by Europe (excluding theUK) at 13%, emerging markets (11%) and Japan (9%). It has a further 23% invested in its multi-manager Global Strategies portfolio and 6% in private equity funds.

Shares in the investment trust have a current dividend yield of 1.5%.

Direct property and equity

Meanwhile, the Value and Income Trust (LSE: VIN) has a more unique offering, investing both in UK equities and direct property. By combining investments in these two areas, the fund aims for long-term real growth in dividends and capital value without taking on too much undue risks.

Property investments account for a growing proportion of its assets and currently represents a little more than a third of its portfolio value. The trust focuses on higher yielding, less fashionable areas of the UK commercial property market.

It has a preference towards assets with long, stable income streams, particularly those benefiting index-linked rent reviews. Such index-linked leases account for 62% of the portfolio’s rental income, affording it substantial protection against inflation. And to further underscore its risk-averse culture, the property portfolio has a long average unexpired lease length of 14 years, with investments being funded for many years by long-term fixed rate loans.

High yield

In the equity space, it’s invested in a diversified portfolio of primarily high-yield stocks, which includes many medium- and smaller-sized companies. Its largest equity holdings include Beazley, Unilever, Halma, BP and Legal & General.

Trading at an 18% discount to its net asset value (NAV), shares in the Value and Income Trust are attractively priced. Dividends per share for the trust grew by 3.6% to 11.4p this year — marking its 31^st consecutive year of dividend growth, and giving shares in the trust a yield of 4.2%. 

The good news is that some of them have been around for 100 years or more, so they have a lengthy record for investors to consider before buying. 

One that has recently popped up on my radar is the Value and Income Trust (LSE: VIN), which has a unique investment approach. 

A unique approach

Unlike other funds, Value and Income invests in both shares and property directly and has been successful with this strategy for over 30 years. 

Set up in 1986, over the past 31 years the investment trust has grown its net asset value from 44p per share at inception, to 356p today, a compound annual growth rate of 7.2%. Including dividends the trust has returned 7.6% per anum over this period, smashing the FTSE All Share’s return of 4.7% per annum. 

These steady, market-beating returns show that Value and Income’s strategy works but today, shares in the trust are on special offer. At the end of September, the net asset value was reported at 356p per share, so at current levels, the shares are trading at a discount to NAV of 23%. 

As well as the discounted valuation, the shares support a dividend yield of 4.1%. So, if you’re looking for an undervalued investment trust with a proven record of creating value for investors, this one ticks all the boxes. 

An investment in the future

Value and Income is a defensive trust with an impressive record but if you’re looking for something with a bit more risk, and a bet on future technologies, Polar Capital Technology Trust (LSE: PCT) might be for you. 

Over the past five years, shares in Polar Capital have gained a little over 200% as it has benefitted from the global tech boom. And today, the company announced yet another strong portfolio performance for the six months to the end of October. In the period, it reported a 19% rise in its NAV per share, outperforming its benchmark, the Dow Jones World Technology Index by 2%. 

According to management, gains came from companies benefitting from growth in payments (PayPal Holdings Inc), robotics (Cognex Corp) and iPhone content (Universal Display Corp). 

Unfortunately, while Polar Capital is a great way to play future trends, high demand means that it trades at a slight premium of 0.5% to NAV. No dividend is offered, but with such a strong capital performance over the past five years, arguably income is not necessary. 

Since the beginning of 2014, it has produced a total capital return of 731% for investors. Over the same period, the FTSE 100 has returned only 70% — it’s hard to ignore this scale of outperformance. 

If you’re looking to invest in the technology of the future, with a fund that has a proven record of beating the market, Polar Capital might be the company for you.