close
Investment trusts for income

 

 

 

 

Investment trusts have a number of advantages for income investors.

 

Firstly, investment trusts have an accounting feature called revenue reserves. These reserves are effectively the repository for income earned in previous years but not paid out.

The investment trust rules allow up to 15% of the income that an investment trust’s portfolio (of equities, bonds or other assets) generates, to be retained by the trust in the aforementioned revenue reserves for a ‘rainy day’, allowing ‘smoothing’ the dividend when earnings in subsequent years may not be as strong.

Effectively, the board can choose to shore up the trust’s dividend with these reserves if the income its portfolio generates in a given year in the future is insufficient to maintain the dividend it has promised in the past.

OIECs do not have this feature. The only influence that an OEIC manager has on the income his fund pays out is the stocks he owns.

If the amount received that portfolio of stocks pays is lower, or higher, than the previous year, the OEIC just pays it out – there is no smoothing, and no consideration of what level would be prudent.

In contrast, an investment trust has many more layers of decision making, importantly by those whose reputations are implicitly tied to the fortunes of the vehicle – the trust’s independent board of directors.

Assuming a trust has a revenue reserve, it is down to the board to decide what to do with it once the trust’s company secretary and/or accounts team adds up the income, and deducts costs.

The board decides the dividend level depending on current income, expectations of future income, reserves available and stated policy of the company.

These checks and balances, as well as the legal framework, mean that in our view the dividend income from an investment trust is likely to be significantly more reliable than an equivalent OEIC.

 

 

Visit for more information:

 

Investing Basics: What are Investment Companies?

spender to investor

From a spender to an investor: Using your spare money wisely

Leave a Response

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Be informed as this exciting sector develops and receive DIY Investor Magazine free to your inbox – take control of your financial future