Smart investors use these investments for income - here’s how

In this episode of The Personal Investor Podcast, host Ed Monk welcomes Fidelity's financial journalist Richard Evans to explore how seasoned investors use investment trusts to generate reliable, inflation-beating income. The discussion centers on the unique structure of investment trusts—listed companies that pool investor money to hold diversified portfolios of shares—distinguishing them from standard funds by their ability to trade at premiums or discounts to net asset value. A key advantage highlighted is the trusts' capacity to smooth dividend payments over time, allowing managers to retain earnings in strong years to maintain payouts during downturns, thus avoiding dividend cuts. Evans introduces the 'Dividend Hero' list compiled by the Association of Investment Companies (AIC), which identifies trusts with at least 20 consecutive years of rising dividends—some with records stretching back 60 years. While few trusts beat inflation every single year, analysis shows that around 80% of these heroes have maintained dividend growth in real terms over the past decade, even amid high inflation. The episode emphasizes that for income-focused investors, especially retirees, finding trusts with both high yields and a proven track record of consistent, inflation-adjusted growth is a powerful strategy. The conversation concludes with a reminder that while capital gains are secondary for income investors, the long-term performance of these trusts often delivers both income and modest capital appreciation. Key takeaways include: 1) Investment trusts offer dividend smoothing, reducing the risk of cuts during poor market years; 2) The AIC’s 'Dividend Hero' list identifies trusts with 20+ years of uninterrupted dividend growth; 3) While not every dividend increases with inflation annually, most dividend heroes have kept pace on average over time; 4) Investors should prioritize trusts with both strong yield and long-term dividend growth; 5) For retirees, a combination of 4% yield and inflation-linked increases aligns well with sustainable withdrawal strategies; 6) The long-term culture of stability and consistency in investment trust management makes them ideal for income-focused portfolios. The episode concludes with a strong endorsement of the AIC’s research and a call to explore Richard Evans’ article on Fidelity’s website for deeper insights.