Ian Cowie: the ‘magnificent seven’ investment trusts for income seekers

Exclusive research from our columnist highlights the investment trusts yielding above 4.5% that have produced inflation-beating income growth over the past five years.

How would you like to meet the ‘magnificent seven’ investment trusts for reliable and rising income? What this investor, aiming to pay for an enjoyable retirement, has in mind are shares that deliver decent dividends now and which have a track record of raising shareholders’ income ahead of inflation.

To be more specific, they have to currently yield at least 4.5% -  to match the best instant-access deposit accounts available now - and have increased the income they pay by at least an annualised 4.5% over the last five years, because that happens to be the average rate of inflation during this period, as measured by the Consumer Prices Index (CPI). Oh, and it would be good if they could have also generated positive total returns over those five years.

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That’s a pretty stiff challenge when this period included the Covid-19 pandemic, and continues to be blighted by the worst war in Europe since 1945. But the good news is that Nick Britton, head of intermediary communications at the Association of Investment Companies (AIC), crunched the numbers and found just seven investment trusts that proved up to the challenge.

He told me: “It’s hard to find investments that can beat high levels of inflation in the short term, but over the long term it’s a different story. Investing in the stock market has proved to be a good way of guarding and growing the real value of your wealth over the decades, if you are prepared to accept some ups and downs along the way.”

So, without further ado, here are the ‘magnificent seven’ for reliable and rising income.

CT Private Equity Trust (LSE:CTPE) leads the pack with its current yield - that is, income expressed as a percentage of share price - running at 5.39%, after rising by an annualised rate of 12.91% over the last five years, with an eye-stretching total return of 78% over the same period. Hamish Mair is the Columbia Threadneedle manager of this fund with £543 million in assets.

As you might expect in the AIC’s ‘Private Equity’ sector, where the underlying assets need not be listed on any authorised stock exchange, there are no ‘household names’ in its top 10 holdings. Perhaps more surprisingly, 42% of assets are in Britain and another 37% are in Continental Europe. Either way, CTPE shares, which are listed on the London Stock Exchange, are priced 33% below their net asset value (NAV), and might deserve a higher profile.

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JPMorgan Claverhouse (LSE:JCH) stands second in this line-up with a current yield of 5.15%, which it has raised by 4.88% over the last five years, to deliver a total return of 8.6%. Callum Abbott and William Meadon are the managers of this £470 million UK Equity Income sector stalwart where the underlying holdings are led by AstraZeneca (LSE:AZN), Shell (LSE:SHEL) and HSBC Holdings (LSE:HSBA). The discount to NAV is a modest 3.9%.

Lindsell Train Ord (LSE:LTI) ranks third, yielding 5.14%, which has risen by an annualised 19.3% to deliver total returns of 7.4%. Top 10 holdings of this Global sector fund, managed by the eponymous Nick Train, include Diageo (LSE:DGE), Heineken Holding NV (EURONEXT:HEIO) and Unilever (LSE:ULVR) with 40% of the portfolio invested in its own management company, Lindsell Train Ltd. That has worked well in the past but might represent too much concentration of risk for some.

Bear in mind that this trust, which has assets of over £210 million, puts a much greater emphasis on growth over income.

CT Global Managed Portfolio Income Ord (LSE:CMPI), another Columbia Threadneedle fund, came fourth, with a current yield of 6.49%, rising by 4.78%, having delivered total returns of 5.2%. This £65 million investment trust from the AIC’s ‘Flexible Investment’ sector, managed by Peter Hewitt, invests in other investment trusts, currently led by Law Debenture (LSE:LWDB), NB Private Equity Partners (LSE:NBPE) and Murray International (LSE:MYI).

None of the remaining three among our ‘Magnificent Seven’ investment trusts for reliable and rising income managed to produce a positive capital return over the last five years, which shows what a difficult time it has been. They are Diverse Income Trust (LSE:DIVI), abrdn Equity Income Trust (LSE:AEI) and TR Property (LSE:TRY).

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On the usual three criteria, Diverse Income yields 4.79% income, rising by 5.39% per annum but shrunk shareholders’ capital by 6.3%. abrdn Equity Income Trust pays 7.11%, increasing income by 5.83% but shrinking capital by 10%. Meanwhile, TR Property yields 5.34%, rising by 4.9%, but fell by 16.7%.

No wonder Britton said: “Quite often there is a trade-off in investment between higher yields now, and higher levels of income growth in future. The seven investment companies highlighted in this research – a pretty diverse bunch – have been able to provide a happy medium between these two desirable outcomes over the past five years.

“However, dividends are never guaranteed, and nor is dividend growth. Income-focused investors should maintain a diversified portfolio in line with their investment horizon and risk appetite, then remain calm during volatile periods and stick to the plan.”

Failing that, readers of a certain age may just have to recall the steely stoicism of Yul Brynner, Steve McQueen, Charles Bronson, Robert Vaughn, Brad Dexter, James Coburn and Horst Buchholz. They don’t make them like that anymore.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Diageo (DGE), Heineken (HEIO) and Unilever (ULVR) as part of a globally diversified portfolio of investment trusts and other shares.