Fight back against inflation – get 5% tax-free income PLUS capital growth ‘great combo’

As consumer prices rocket but savings rates remain low, income seekers should consider taking on a bit more risk by investing in investment trusts. They have a history of delivering annual income growth and can play a useful part in building retirement wealth, a top expert says. The income can be taken free of tax inside your £20,000 Stocks and Shares Isa allowance.

Investment trusts have greater flexibility to ease some of the shocks of the stock market and to maintain a rising and sustainable income through periods of volatility, says Joseph Hill, senior investment analyst at Hargreaves Lansdown.

They can hold back up to 15 percent of their income when times are good, effectively creating a rainy day pot for troubled times. 

“If the dividends paid by the trust’s investments fall one year, the manager can dip into the reserve to make up any shortfall.

“So, the trust can top up dividends in the bad years and smooth out the dividends investors receive over time”

They can also use the profits they make from buying and selling investments to fund higher income levels than savers can get on cash, Hill adds. “The income can help mitigate rises in the cost of living or you could reinvest it to buy extra shares in the trust.

“Over the long term, this can be an effective way to grow capital, though there are no guarantees.”

Hill names three top income-paying investment trusts, starting with the City of London Investment Trust.

Manager Job Curtis has been running the fund for more than 30 years and targets good quality, well-managed companies, which can be bought at reasonable prices. “He likes larger, more stable companies that often have multinational operations that are robust enough to weather economic storms and still pay dividends.”

Curtis is part of a large and experienced team of income investors at Janus Henderson and is focused on providing long-term growth in income and capital.

City of London has consistently increased its dividend for a record-breaking period lasting 56 years. Today, it yields 4.71 percent.

Hill also picks out the Merchants Trust, run by Simon Gergel, which invests mainly in larger companies listed in the UK with the aim of providing a growing income and capital return over the long term.

The trust increased its dividend by 0.4 percent in the year to January 31, 2022, again, using reserves accumulated during the good times to boost the income paid to investors. 

This is the 40th consecutive year that the trust has increased its dividends, offering steady, rising income growth.

It currently yields 4.90 percent.

READ MORE: Fight back against inflation – get 7% retirement income that rises

Hill’s final pick is the Murray International Trust, managed by Bruce Stout of fund manager Abrdn since 2004. 

“Stout aims to grow income and capital over the long term by investing in company shares from around the globe, as well as holding some bonds. 

“The trust invests more in higher risk emerging markets compared with some peers, with Asia Pacific (excluding Japan) representing the trust’s biggest regional exposure.”

Stout and his team invest in high-quality, financially robust companies that have the potential to grow earnings and dividends over the long term.

The trust increased its dividend by 0.9 percent in the year to the end of December 2021. This is the 17th consecutive year that it has increased its dividend.

It currently yields 4.34 percent.

While investment funds offer higher yields than cash savings accounts, the income is not guaranteed and past performance is no indicator of future success, Hill warns. 

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