I am always on the lookout for passive income investments. And I believe investment trusts are some of the best ways to invest for income.
Unlike other investment vehicles, these companies do not have to pay out all of the income they receive from their portfolios each year. They can hold 15% back in reserve.
This means they can hold back some of the income they receive in good years and use it to boost dividends when businesses may be cutting theirs.
This structural advantage gives investment trusts a unique quality. It also means they have been able to pay consistent dividends through both the good and bad times.
This quality is the main reason why I believe investment trusts deserve a place in my passive income portfolio. With that in mind, here are two trusts I would buy for income right now.
Investment trusts for income
The first on my list is the City of London Investment Trust (LSE: CTY). This firm has one of the longest track records of consistent dividend increases in the investment trust space. It has continually increased its payout for 55 years.
The portfolio is concentrated in a diverse basket of London-listed equities. At the time of writing, the stock supports a dividend yield of 4.8%.
A downside of using investment trusts to invest for income is they tend to charge an annual management fee. In this case, it’s nearly 0.4%. This charge could eat into investor returns in the long run.
There will also be a chance the manager could pick the wrong investments, incurring losses for my portfolio.
Even after taking these factors into account, I would buy the City of London for my portfolio as an income investment today.
Passive income play
While City of London has a UK focus, the Bankers Investment Trust (LSE: BNKR) has a more diverse focus.
Like City, Bankers has also been paying and increasing its dividend for 55 years. At the time of writing, the stock supports a dividend yield of 2%. It has an annual management charge of 0.5%.
Some of the most significant holdings in the portfolio are international growth and income giants. The largest is technology group Microsoft. The trust has made a trade-off here. Rather than focusing on income alone, it focuses on income and growth, which has produced better capital returns in the long run.
Still, Bankers’ focus on growth stocks rather than income plays alone could expose me to more volatility. If these companies do not live up to the market’s lofty growth expectations, they could underperform and hit the trust’s returns.
The focus on growth and the lower yield are the reasons why I would own this company alongside the City of London. I think the two corporations complement each other perfectly.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
