By Pensioners living off dividends face a tightening of the purse strings after nearly £4.6bn worth was cut by businesses struggling due to coronavirus. But some investment trusts are well placed to provide a safe, growing and high-yielding income.
The pandemic and subsequent lockdown has brought the economy to a screeching halt, forcing under-pressure companies to slash payouts – further cuts are expected. This may be the right choice for shareholders in the long run but it leaves thousands without their investment stipend.
Investment trusts – funds that own shares of businesses and listed on the stock exchange – are favoured by income seekers as many pay dividends to their shareholders, simply transferring what the fund receives in payouts to investors.
However, investment trust managers can keep cash in reserve to maintain the dividend even when stocks cut theirs. This is known as a "revenue reserve". Telegraph Money looks at safest high income-paying investment trusts on the market and highlights some of its favourites.
The Law Debenture investment trust holds the most reserves among income-focused trust that invests predominantly in British shares. The £730m portfolio is run by James Henderson, one of the longest-tenured fund managers in Britain, and could pay its dividend for two years using just its reserves.
The trust has a dividend yield of 5.7pc and its shares are currently trading at a discount, meaning they are priced 5pc cheaper than the worth of the overall portfolio.
Yield | What is it?
It is one of seven investment trusts investing in British companies that has a yield of more than 5pc and enough dividend cover to last 18 months or more.
Alan Brierley of Investec, an investment trust research firm, said the experience these companies gained from the global financial crisis gave him “comfort” that they were prepared.
“This year, despite sharp cuts to company payouts, 11 out of 14 British income investment trusts increased dividends,” he said.
For trusts that invest globally, Majedie is one of the safest options. The £150m fund has a dividend yield of 7pc and has enough cash to cover payouts for the next four years without any income from its stocks.
The income-paying investment trusts with the most dividend cover
The trust is different to others as it has almost a quarter of its portfolio invested in the management company – Majedie Asset Management – with the remainder of the portfolio in other funds run by the firm. The share price has fallen in recent weeks and the trust can be bought at 146p per share, a 30pc discount to the actual value of its holdings.
Another good option is the £415m Aberdeen Diversified Income & Growth trust, a fund that can invest in stocks, bonds and alternatives such as gold and property.
It currently yields more than 7pc and holds more than two years’ worth of dividends in cash. It has also suffered a large share price fall recently and can be bought for 76p per share, a discount of 27pc.
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