As an older Fool, I love generating passive income. One of my main goals is delivering unearned income for my family. But like work itself, producing passive income is no pushover. In my working and investing life, I’ve encountered these five problems with building passive income:
1. Time and effort
Like everything worthwhile, making and managing money is not easy. It takes time and effort, often with significant upfront work. Also, making better financial decisions means understanding the pitfalls and rewards of money management, which can be boring.
2. Continuous upkeep
Once a plan is in place, it requires constant (even lifelong) commitment. Making extra income is not ‘fire and forget’. This endless maintenance is why my wife and I never became property landlords. We just couldn’t face dealing with tenants, repairs, etc.
3. Initial investment
Making extra financial income often requires some initial investment, because there’s rarely such thing as a free lunch. But making money from, say, stocks and shares doesn’t require a fortune. When I started investing in the 1980s, my yearly purchases probably totalled a couple of hundred pounds. However, this strategy snowballed over decades to improve our lives immeasurably.
4. No guarantees
The future is inherently uncertain. It’s impossible to predict what might be just around the corner, never mind in 10 or 20 years. Investing for income is a long game with no guarantees of success. Then again, a disciplined and long-term approach usually reaps rewards — but not for owners of Russian shares when the revolution came in 1917!
5. Risk of loss
As one old saying goes, the greater the risk, the greater the reward. But taking huge risks can cause a ‘permanent capital loss’ (losing more than is affordable). For example, I once lost £675,000 in 13 months on a single share that went to zero. This caused me great pain, but taught me lucrative lessons about taking excessive risks.
Delightful dividends
My family portfolio generates plenty of passive income from shares, plus some interest from highly rated bonds. Right now, we own maybe 30 different US stocks and UK shares, mostly for their dividend income.
Alas, share dividends are not guaranteed, so they can be cut or cancelled at short notice. That’s why I buy into solid businesses with good dividend histories, such as FTSE 100 firm Legal & General Group (LSE: LGEN).
Legal & General is one great British business I truly admire. Founded in 1836, today it is a leading provider of UK life assurance, long-term savings, and investment products. It currently manages over £1.1trn of assets for individuals and institutions.
This company has an enviable dividend record. In 2014, the dividend was 13.4p a share. This reward has risen every year since, except for Covid-wracked 2020, when it was unchanged from 2019. In 2024, the payout was 21.36p — up 59.4% in nine years.
As I write, this stock trades at 241p, valuing the group at £13.7bn. Its dividend yield is a whopping 8.9% a year, one of the very highest in the London stock market.
I suspect that in the next financial meltdown, L&G shares will take a beating as its earnings and cash flow fall. But the company has billions of pounds in reserves to keep paying dividends, so I hope to own this stock in perpetuity!
Foresight Solar Fund Limited Update on UK Carbon Price Support removal
Foresight Solar Fund Limited
(“Foresight Solar”, “FSFL” or the “Company”)
Update on UK Carbon Price Support removal
Foresight Solar, the fund investing in solar and battery storage assets to build income and growth, notes the UK government’s announcement on 16 April 2026 that it will remove the Carbon Price Support (CPS) mechanism from April 2028. The government’s move is intended to reduce wholesale electricity prices for consumers and industry in the medium term.
Based on the investment manager’s analysis, the removal of the CPS is expected to have a limited impact on Foresight Solar’s net asset value (NAV) of between 0.5 pence per share and 1.0 pence per share based on the 31 December 2025 NAV. As at this date, Foresight Solar’s NAV per share was 99.2p.
This estimate remains subject to review as independent power price forecasters update their forecasts. The Foresight Solar board and the investment manager will provide a further update in due course.
The change will have no impact on FSFL’s dividend target and expected 1.1x dividend cover for 2026.
Mitigating factors
It is important to note that the announced removal of the CPS mechanism is not taking place in isolation, with the outlook for UK power markets impacted by a range of factors. The expected effect on Foresight Solar’s NAV is limited by several mitigating factors:
· Active power price hedging: With merchant prices remaining elevated, the Company continues to benefit from its hedging strategy. As a reminder, Foresight Solar took advantage of recent market volatility to contract 87% of global forecast total revenues for 2026, 75% for 2027 and 63% for 2028.
· Market assumptions: Foresight Solar’s power price forecast is based on a blended average from three independent consultants, which captures a range of underlying forecasts. Two of them had already assumed a reduction or removal of the CPS over time, while the third estimated a tapered, longer-term impact. As a result, the effect was already partially reflected in current valuations.
· Geographic diversification: Approximately 25% of FSFL’s portfolio capacity is located outside the UK, reducing exposure to UK-specific policy changes.
· Timing of impact: The effect of CPS removal is expected to be concentrated in the period between 2028 and 2030, with minimal impact on the Company’s near-term cashflows.
· Expected policy harmonisation: The UK and the European Union are currently in the process of negotiating a Carbon Border Adjustment Mechanism that is likely to align Emissions Trading Scheme (ETS) prices.
What is the Carbon Price Support?
The Carbon Price Support is a UK-specific tax applied to fossil fuel-based electricity generation. It increases the cost of generating power from gas and coal, which in turn has historically supported higher wholesale electricity prices.
With coal now fully phased out of the British generation mix and a focus on reducing electricity costs, the government has decided to end this mechanism from 2028. Its removal is expected to result in a modest reduction in UK power prices over time – and was already anticipated to varying degrees by market consultants.
Outlook
The board believes that the impact of this policy change is limited and manageable within the context of the Company’s diversified portfolio and active hedging strategy. Foresight Solar will continue to monitor market developments and hedge production as appropriate to maintain revenue visibility and support its dividend.
The SNOWBALL has a comparator share, to monitor the income available from the SNOWBALL and the income from the comparator share VWRP using the 4% rule.
The fcast income for this financial year is £10,500, the actual income will be around 14k but although this extra income could be spent, it’s not guaranteed to be repeatable as it contains some special dividends.
The value of the comparator share VWRP, using 100k of seed capital is £159,642, not too shabby.
Using the 4% rule you could today withdraw income of £6385, if you use the 4% rule, it’s recommended to have a 3 year cash buffer, so you are not selling shares during market crashes.
You have to decide for yourself, how your replace your cash buffer if markets are crashing and you then have to sell shares to replenish your cash buffer, otherwise you are taking a big risk with the rest of your retirement.
One option if your plan includes taking out your tax free amount, to build 25% of your portfolio in VWRP or a similar share.
Income using and annual rate of 7% nearly doubles every ten years, if we jump to the 30 year figure, you would receive income of 51k.
The SNOWBALL is currently well ahead of the current plan but 30 years is a long, long time, so if you are not be able to re-invest at that rate every year, your journey may take longer, although with the current enhanced dividends with ETF’s it could be shorter.
The table shows that income using the SNOWBALL would be 51% of seed capital, every year without selling any shares, although it would still be your duty to check the next fcast dividends for your Snowball.
To earn income of 51k per year, VWRP using the 4% rule would have to be valued at around 1.2 million to provide the same amount of income.
Remember the quoted amounts do not take into account inflation
If there’s a superstar in the world of retirement planning, it’s William Bengen. His “4pc rule” has helped countless people avoid running out of money in retirement.
Mr Bengen, an American financial planner, conducted a detailed analysis of a huge number of hypothetical retirement scenarios in a range of economic circumstances to arrive at his rule.
He found that even investors who retired at the worst possible time would be able to fund a 30-year retirement if they limited withdrawals to 4pc of their savings in the first year of retirement and increased them in line with inflation thereafter.
Some would be able to withdraw more each year, fund a retirement longer than 30 years or even leave at death a large sum to pass on to their children.
In the three decades since he published his original research, Mr Bengen has continued to refine his rule as further data was released, enabling him to improve his analysis. Much like Mr Bengen, those applying his rule should keep an eye on the markets and inflation to ensure their plan remains sustainable.
Here, Telegraph Money explains how to use it:
How much of your pension fund can you safely withdraw?
The rule is simple: if a retiree were to withdraw 4pc of their pension pot in the first year of their retirement and then increase withdrawals by the annual rate of inflation, their pension pot would last them no less than 30 years.
He modelled his rule from 1926 onwards, meaning that even accounting for “worst case scenarios”, such as the Wall Street Crash and Great Depression, the pot would not run out.
But with a further 31 years of refinement, Mr Bengen has discovered that savers can afford to increase their withdrawals if they plan appropriately.
Years after creating the ‘4pc rule’, William Bengen discovered that savers can afford to increase withdrawals with planning.
His research relates to American investors, but the broad principles also should apply to the UK.
It states that if a pension pot is invested 50-50 between large-cap US stocks and US Treasuries, a saver can draw down their pot starting at 4pc. However, if they add a broader range of assets, including international stocks and smaller US companies, they can safely increase their withdrawals to 4.7pc of the initial pension pot.
How to manage falling markets
If you do plan to fund retirement from a pot of money invested partly in shares, your biggest fear may be a bear market. After all, pension providers allow you to look up the value of your pot every day, and in a bear market, that value will be falling, perhaps dramatically. In those circumstances, it may well feel reckless not only to maintain your withdrawals at a predetermined rate, but to increase them every year in line with inflation.
But when Mr Bengen looked at the figures, he found that the tendency of markets to recover was enough to prevent permanent damage to retirement income from a bear market in the early years of retirement, even at initial withdrawal rates as high as 7.2pc.
In a research paper commissioned by Fidelity International, he said: “Although bear markets can have painful effects on portfolios in the short term, they are usually followed by recoveries, which enable the portfolio to regain its former value and then some.
He did, however, warn that this reassuring conclusion might not apply to particularly severe bear markets.
Stock markets will always tumble thanks to emotional investors. Stay the course and profit
How to manage inflation
Rather than bear markets, what retired investors should really fear is a severe or prolonged bout of inflation, Mr Bengen said. When he modelled the effects of such an inflationary period – specifically, 4.6pc in the first year of retirement and rising to 10.2pc in the seventh year, before a slow decline – for a saver who started with a withdrawal rate of 5.5pc, he found that the saver could not afford to just carry on with the planned withdrawals.
Doing that would result in the withdrawals quickly becoming unsustainable, putting the saver on course to run out of money well before 30 years had passed. In this scenario, what Mr Bengen called a “draconian” 28pc cut in withdrawals in the sixth year would be required to restore the plan’s sustainability.
He added: “How many of us could contemplate a 28pc reduction in withdrawals from our retirement accounts in mid-retirement?
“For many, it would be a severe blow. And, even given this harsh reduction, we can’t be sure it will be sufficient if inflation persists at a high level.
“This underscores the observation that inflation is the greatest threat to the lifestyles of retirees.”
We should emphasise that if the saver had instead stuck to the original 4pc rule and not opted for first-year withdrawals of 5.5pc, all would have been well.
Mr Bengen concluded: “A retirement withdrawal plan requires active management. Adjustments may have to be made during retirement, although not all deviations from the plan require immediate action.
“Bear markets come and go, and many can be safely ignored. However, high, sustained inflation may be the justification for panic.”
When to reduce withdrawal rates
Mr Bengen’s method for reassessing withdrawal rates might require a moment to understand but is simple in principle.
It involves the calculation at the start of retirement of what each year’s withdrawals will be as a percentage of the theoretical value of the pot each year, assuming steady inflation and investment growth at historically average rates.
You then compare, as retirement progresses, that hypothetical withdrawal rate with the actual one. The actual figure, calculated each year, is your actual withdrawal, in pounds, divided by the actual value of the pot at the beginning of that year.
The two withdrawal rates – the hypothetical and the actual – are bound to differ because variations in inflation will affect the amount you withdraw each year, while the value of the pot will, in practice, fluctuate from year to year in line with the financial markets.
It is this difference between the hypothetical and the actual withdrawal rates that you need to pay attention to. Small, brief gaps are nothing to worry about, but a wide and prolonged gap is a sign that withdrawals may be unsustainable.
Ed Monk is an investment writer at Fidelity International. Mr Bengen’s new book, A Richer Retirement: Supercharging the 4pc Rule to Spend More and Enjoy More, analyses more withdrawal scenarios.
Aberdeen Asian Income Fund Ltd ex-dividend date AVI Japan Opportunity Trust PLC ex-dividend date Bankers Investment Trust PLC ex-dividend date City of London Investment Trust PLC ex-dividend date Foresight Solar Fund Ltd ex-dividend date International Public Partnerships Ltd ex-dividend date Invesco Bond Income Plus Ltd ex-dividend date Invesco Global Equity Income Trust PLC ex-dividend date JPMorgan Claverhouse IT PLC ex-dividend date JPMorgan India Growth & Income PLC ex-dividend date TwentyFour Income Fund Ltd ex-dividend date
If you are just starting on your journey, whilst current markets are scary, out of adversity comes opportunity because as prices fall yields rise.
Buying Yield.
If you pick the right share that yield should gently rise over time.
Running Yield
If the price continues to rise, the running yield will fall and you could take out your profit or sell your position and re-invest into your Snowball at a higher yield.
If you look at the chart, compound interest takes a while to make a noticeable difference, so if you are just starting out GL.
You have to allow for inflation but a yield on your original investment of 53%.
Income investors are spoilt for choice when it comes to choosing an investment trust. From traditional equity funds to alternative trusts and those offering ‘enhanced dividends’, there are numerous ways to add a regular payment stream to your portfolio.
Regardless of how you decide to play it there are, however, some underlying principles you should keep in mind.
To start with, building an effective income portfolio should mean investing in a diverse range of trusts, as this helps to avoid duplication in the underlying assets you hold. If one asset class performs badly, the impact on your overall portfolio will be softened if there is sufficient diversity.
This is relatively straightforward to do. An advantage of the investment trust structure is that it allows you to buy into asset classes that are normally difficult for private investors to access, such as infrastructure or private equity. You can, therefore, invest in a broad range of assets alongside traditional equities. Income-focused trusts also tend to cover a variety of geographies, so it’s easy to diversify by region as well.
The complete guide to buying investment trusts
It’s also important not to get too carried away by the pursuit of high dividend yields. A high yield might look attractive in the short term, but not if it comes at the expense of continuous dividend growth over time. If a trust’s yield is at double-digits levels it’s worth investigating why.
“The yield may look attractive because the market is expecting a dividend cut and the shares have de-rated,” says Andrius Makin, associate portfolio director at Killik & Co. To explore whether this is the case, he suggests investigating the trust’s level of dividend cover and gearing alongside the quality of its assets. This will help you to determine whether it is prioritising income over sustainable value creation.
Finding a dividend hero
Reliability is often a key criterion when it comes to selecting a trust. A good starting point in this case is the Association of Investment Companies’ (AIC) list of ‘dividend heroes’.
To earn a spot, an investment trust must have consistently increased its dividend for 20 or more years in a row. However, many in this cohort have been raising their payouts for far longer. As the table below shows, the top four dividend heroes are each now closing in on a 60-year streak.
This is in part due to a handy design feature. Each year a trust is allowed to set aside up to 15 per cent of the income it receives. In effect, this allows trusts to build up a sinking fund. If it has a bad year, the trust can tap into this reserve to cover its dividend.
When it comes to sectors, many dividend heroes have a focus on UK equities, and for good reason. We can see why this is the case if we take a look at one of the top three, City of London (CTY).
The UK has long been a popular region for income investors thanks to its established dividend culture and its abundance of high-yielding companies. City of London, with its 59 years of continuous dividend growth and 3.9 per cent dividend yield, invests primarily in equities listed on the London Stock Exchange.
In its latest factsheet, the trust’s managers, Job Curtis and David Smith, argue that they believe the valuation of UK equities remains attractive, as do their dividend yields, when compared with overseas peers.
The trust has a relatively diversified portfolio, with 78 holdings, including a number of UK stalwarts such as HSBC (HSBA) (6.1 per cent), Shell (SHEL) (4.3 per cent) and AstraZeneca (AZN) (3.4 per cent). Financials – typically a high-yielding sector – is its biggest sector allocation, making up 33.8 per cent of the portfolio.
One thing to bear in mind is that a UK focus may lead to lower longer-term returns if other markets perform better overall. For example, the average share price total return for the AIC UK equity income sector over the past 10 years is 97.7 per cent. By contrast, the MSCI World index has returned 233 per cent over that same period.
However, not all dividend heroes invest primarily in the UK; in fact several take a global approach, such as the other two top-ranking trusts, Bankers (BNKR) and Alliance Witan (ALW).
Again, for diversification purposes, it’s not a good idea to construct your portfolio around a single country. A global income trust can, therefore, be a good way to create some geographical diversity.
It can mean you also add some growth exposure as many global funds will hold tech assets. For example, 34.9 per cent of Bankers’ portfolio is currently devoted to tech, compared with 18.3 per cent of Alliance Witan. This might not be enough to beat the index in the long term – Bankers returned 187 per cent over the past 10 years, while Alliance returned 197 per cent – but it will at least prevent your portfolio from being left behind.
Opting for an enhanced dividend policy
A fund’s record of dividend growth is not the only factor to take into consideration. Trusts fund their payouts in a variety of ways. Some, but not all, will pay out of their natural income. Others, however, take a different approach.
In recent years, ‘enhanced dividend policies’ have been gaining popularity. They involve a trust committing to paying out a percentage of its net asset value (NAV) each year as a dividend.
This has its advantages and disadvantages. A positive is that it can be another good way to add diversity to your portfolio. Invariably, income trusts tend to gravitate towards certain sectors (such as financials) in the pursuit of high yields. But having a portfolio that is dominated by certain sectors opens you up to diversification risk, particularly if those sectors are cyclical as is the case for financials. It can also mean your portfolio becomes geographically concentrated, as many income trusts will have a UK bias.
Trusts with enhanced dividend policies are not so constrained in their stock selection choices. Rather than focusing primarily on companies paying dividends, they can afford to prioritise growth-focused assets. This is evident if we look at a high-profile example. JPMorgan Global Growth & Income (JGGI) is one of the most prominent trusts to have an enhanced dividend policy. It aims to pay out 4 per cent of its NAV each year; its dividend yield currently stands at 4.17 per cent.
While it does have a relatively big allocation to financials at 10.2 per cent, its largest sector allocation is technology at 18.9 per cent. It is also overweight geographically to the US (5 percentage points above its benchmark) and underweight to the UK (by 1.2 percentage points). Its top five holdings are tech-dominated and include Nvidia (US:NVDA) at 6.2 per cent, Taiwan Semiconductor (TW:2330) at 4.2 per cent, Microsoft (US:MSFT) at 4.2 per cent, Amazon (US:AMZN) at 3.9 per cent and Apple (US:AAPL) at 3 per cent.
However, enhanced dividend policies are not without their problems. While this strategy works well when the going is good and markets are up, this approach can come undone during downturns. “It can eat into the trust’s assets during difficult market periods when the NAV isn’t growing,” warns Kamal Warraich, head of fund research at Canaccord Wealth. “This means a shrinking asset base and less capital to do other things with, like share buybacks,” he adds.
Alternative trusts focused on income generation
Another way to diversify an income portfolio is to invest in alternative trusts. As the chart below shows, these tend to offer attractive yields.
While there are many directions you can head in if you are interested in alternatives, infrastructure trusts have long been a popular choice thanks to their long-term records of producing a stable income.
High yielders in this sector include GCP Infrastructure Investments (GCP) (9.6 per cent yield), Sequoia Economic Infrastructure Income (SEQI) (9 per cent yield), HICL Infrastructure (HICL) (6.9 per cent yield) and International Public Partnerships (INPP) (6.7 per cent yield).
Of this selection, Makin favours International Public Partnerships. “The portfolio holds some interesting assets, such as the Thames Tideway Tunnel and the Sizewell C nuclear power plant. Although sewage and nuclear power may not be the most glamorous areas to invest in, I’m very confident they will still be in demand in 50-plus years,” he says. On top of this, many of the trust’s assets are government-backed with payments linked to inflation, Makin notes. This may provide some much-needed peace of mind for many investors given the uncertain inflationary climate.
As an infrastructure subgroup, renewable energy trusts are also worth considering due to their high yields. Many currently offer dividend yields in excess of 10 per cent, including NextEnergy Solar Fund (NESF) (19 per cent) and Foresight Solar Fund (FSFL) (12.8 per cent).
However, part of the reason for this is that the sector has had a tricky year, thanks to a combination of low power generation and lower than forecast power prices, along with high discounts. This has even led to some trusts promising to cut their dividends. NextEnergy Solar Fund, for instance, will cut its dividend payout to the equivalent of a 7-8 per cent dividend yield for the 2026-27 financial year following a strategic review. Meanwhile, SDCL Efficiency Income (SEIT), which yields 15 per cent, recently announced plans to wind down. It’s therefore worth closely examining trusts in this sector before making a decision.
Finally, if you do decide to invest in alternatives, bear in mind the size of your holding. Given the riskier nature of these trusts, it is sensible to ensure that no single alternatives fund makes up more than 5 per cent of your portfolio. This way your investment will be sizeable enough to contribute income in a meaningful way, but not so large that it will cause significant damage if something were to go wrong.
We look at the dos and don’ts when picking trusts and suggest a starter portfolio to get you going
Published on April 15, 2026
by Val Cipriani
The dos and don’ts of picking a trust.
Portfolio upkeep.
A model portfolio to get you started
Can you build a whole portfolio using only investment trusts? To an extent, that depends on your needs, but for most investors, the answer would be ‘absolutely’. Indeed, at a time of high global uncertainty and market volatility, there’s something very reassuring about active management – and about an independent board keeping an eye on what those managers are doing.
Regardless of which type of fund you use, the key principles of portfolio construction remain the same: think about your time horizon and objectives, consider your risk appetite, then decide on a strategy and pick the investments to match it. You can gain access to a broad range of geographies and asset classes via investment trusts; if anything, the problem is that there is almost too much choice.
The dos and don’ts of picking a trust
The investment trust structure does, however, have some specific features that you need to keep in mind when constructing your portfolio.
Trusts trade as shares, so their size and liquidity matter. A trust that is too small can become difficult to sell. And there’s a lot of merger and acquisition activity in the sector at the moment, so a small trust is also more likely to disappear – either because it is absorbed by another trust or because the portfolio receives a cash offer from a third party.
The complete guide to buying investment trusts
If your goal is building a long-term buy-and-hold portfolio, you arguably shouldn’t obsess over discounts. Don’t ignore them, but you shouldn’t pick a trust just because it looks cheap, or just because you have reasons to hope the discount will close. This would be a nice-to-have boost, but ultimately the characteristics of the underlying portfolio are a lot more important in the long run.
On the other hand, you should be wary of buying a trust at a premium, especially at a time when most are discounted. Even a slight worsening of the portfolio performance can erase that premium very quickly, and turn the best-performing trust into a poor investment.
At the end of October 2025, private equity trust 3i Group (III) was trading at an eye-watering premium of 61 per cent. Then the outlook for its main holding, Dutch discount retailer Action, darkened a little. Fast-forward to the present day, and the trust is trading at a discount of about 12 per cent; investors who bought at the top of the market will be sitting on heavy losses.
“Trusts that move to trade on big premiums usually ring alarm bells for me,” says James Carthew, head of investment companies at QuotedData. However, he adds that it is worth checking whether the premium exists because the net asset value is out of date, which can happen when a trust holds unquoted underlying assets that are priced less frequently.
It is also worth thinking about how you can best exploit the investment trust structure for your investment goals. Do you need regular income that rises with inflation? You could pick a ‘dividend hero’, or one of the trusts with a long record of increasing its payout every year regardless of circumstances – City of London (CTY) is one example. Are you feeling especially bullish towards a certain sector or geography? Then pick a trust that deploys gearing for a more high-conviction approach.
Portfolio upkeep
Once your portfolio is up and running, the rule of thumb is to review it every six months, give or take. You are relatively safe just letting it be for the rest of the time. As Carthew puts it: “In theory, investment trusts are the ultimate ‘buy and forget’ investments – not that you should neglect to keep an eye on your portfolio, but you should at least be able to take comfort that if something is going wrong, the board (whether encouraged by activists or not) should step in and fix things, by changing the manager, for example.”
Of course, that doesn’t mean that you never sell. “Be very wary of attempts to force a change of remit or investment style on you,” he says. “If I have deliberately bought a ‘value’ trust and the board is trying to shift towards a ‘growth’ style because that is what is working currently, I’d most likely end up selling.”
And you can use your regular review to trim holdings that have done well, rebalancing your portfolio back to the original strategy. Carthew says: “A lot has been written over the years about the futility of trying to time markets, but I am a great believer in top-slicing things that have done really well, or at least thinking very hard about how large a percentage of your portfolio you want this trust to be, and looking for bargains among the trusts that everybody seems to hate.
“In momentum-driven markets that can feel like poor advice, but then circumstances change and you get to feel smug about selling something close to the top of its trading range.” He recently had this experience with Golden Prospect Precious Metals (GPM). The trust’s shares dropped about 11 per cent between the start of the war in Iran at the beginning of March and 8 April, as the gold price fell and its investment managers resigned.
A model portfolio to get you started
There are countless ways to build a portfolio of investment trusts, depending on your goals, needs and preferences.
We asked Ben Yearsley, investment director at Fairview Investing, to put together a basic trust portfolio that investors could use as a starting point.
The ideal investor for this portfolio is someone who has some knowledge of investing but is not yet a trust expert, and wants to keep things relatively simple. The goal is long-term growth, with a time horizon of 10 to 15 years, so investors need not be concerned about short-term volatility. Keeping trading costs low is an important consideration, so Yearsley has opted for just six trusts.
This portfolio blends various types of equity exposure, including a couple of pretty aggressive options, with two lower-risk holdings: Personal Assets (PNL) and International Public Partnerships (INPP).
Personal Assets is one of the so-called ‘wealth preservation’ trusts. It aims to protect your capital first, and grow it second, using a mixture of stocks, gold and bonds. Its equity exposure of 39 per cent as at the end of January was a little higher than that of competitors Ruffer (RICA) and Capital Gearing (CGT), and indeed Personal Assets has tended to offer a little more growth than the other two in recent years. But it remains a prudent choice.
INPP invests in a range of unlisted infrastructure assets, many of which offer regular, government-backed revenue. It’s a fairly vanilla investment with a decent yield (6.7 per cent at the time of writing) and should be able to keep up with inflation without being too volatile.
For the global equity part of the portfolio, Yearsley pairs the aggressive growth play that is Scottish Mortgage (SMT) with the more sedate Brunner (BUT), whose portfolio he describes as “a good mix of quality value and growth”.
For investors with a long time horizon, it makes sense to have exposure to Asia and emerging markets, which have higher potential for growth in the long term. Yearsley adds that he would have suggested a China, India or Vietnam trust for a higher-risk portfolio, but that Schroder AsiaPacific Fund (SDP) is a good option for beginners. The trust’s managers look for “quality but undervalued” companies. Note that it has a giant position in the biggest company in the region, chipmaker TSMC (TW:2330), which accounted for nearly 17 per cent of the portfolio at the end of February. Samsung Electronics(KR:005930) accounts for just shy of 12 per cent, meaning that this trust has a lot of AI-related exposure.
Yearsley’s portfolio can then be personalised to match your specific needs. Six trusts is a relatively low number, but as well as keeping trading fees low, this means it is easy to keep on top of if you don’t have much time to dedicate to it. Once you become more experienced and the portfolio grows, you can add more specialist and sophisticated options. When you are a little more advanced, experts usually suggest having between 10 and 15 funds in your portfolio.
You can also tweak Yearsley’s portfolio to modify the level of risk, depending on your personal attitude, time horizon and goals.
If you want to stick to investment trusts alone, increasing or decreasing the position in Personal Assets is an easy way of modifying overall risk exposure, because it (like other wealth preservation trusts) has significant exposure to bonds. Otherwise, you can add some more fixed income by buying bonds directly or using a bond fund. The investment trust sector does have a handful of fixed income plays, but they are arguably somewhat complicated – open-ended funds offer more straightforward options in this area.
If you are a more adventurous investor and want to build a more nuanced portfolio, high-growth sectors you can add exposure to include private equity, smaller companies, technology and emerging markets. If you need more income you can look at using income trusts that go beyond the UK – examples include Murray International (MYI) globally and Invesco Asia Dragon (IAD) for Asia.
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services.
Image source: Getty Images
Most of us dream of ditching work sooner and taking early retirement with a large passive income. It’s a brilliant thought, and one that may be easier to reach than you think.
Investing in a Stocks and Shares ISA saves investors a fortune in tax, and it’s tailored to capture the long-term power of the stock market. With more than 5,000 ISA millionaires in the UK, the enormous benefits are there for all to see.
But you don’t need to build a million-pound portfolio to retire early. How large does an ISA need to be to make this reality? And how can investors go about acheving it?
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Income target
The size of the portfolio needed will differ from person to person. No two peoples’ financial circumstances are the same. Nor are their plans for retirement. But it’s important to have a ball park figure in mind to aim for, and the one I use is that provided by Pensions UK.
Their research suggests the average Brit needs £43,900 annual income to retire comfortably. That’s on the basis of a one-person household. The figure for a two-person household is £60,600, suggesting a smaller individual nest egg may be required.
However, I think the higher figure could be the better one to aim for, regardless of one’s living arrangements. That way, you can have an extra buffer against rising costs and any unexpected expenses.
Now onto the maths…
For an individual passive income of £43,900, someone would need a Stocks and Shares ISA of just over £627,000. That’s assuming they rotated their capital into dividend shares with an average yield of 7%.
What should ISA investors buy?
There are multiple ways to turn an ISA into a regular income. I like the dividend stocks idea, because it can deliver a steady stream of cash and further portfolio growth over time. Dividends aren’t guaranteed, which is an obvious drawback, but retirees can target a reliable income with a wide selection of shares, trusts, and funds.
Investment trusts like Henderson High Income Trust (LSE:HHI) can be brilliant ‘cheat codes’ for achieving large and reliable dividends. The reason? Their holdings often span a huge range of regions and industries, reducing the risk of dividend shocks on overall returns
This trust holds shares in 57 heavyweight UK dividend shares including Rio Tinto, National Grid, HSBC, and Unilever. We’re talking firms with strong balance sheets, leading positions in mature markets, and diverse revenue streams. It’s a formula that’s delivered unbroken dividend growth for 13 years.
By focusing on British shares, it’s vulnerable to falling interest in London stock market companies more generally. But on the whole it’s a great trust to consider, in my view. For this year its dividend yield is a generous 5.7%.
Hitting our £627k goal
With our ISA target of £627,000 now drawn up, how long could it take to achieve this? Based on an average stock market return of 9% a year, it would take 22 years and 10 months based on an £700 monthly investment.
That would allow a 40-year-old to retire years before their State Pension age of 68.
Expected dividends for the SNOWBALL, I’ve omitted the share names as your Snowball should be different to the SNOWBALL
£4,142 is the amount of dividends earned so far this calendar year and as you will note that some of the dividends expected in May are still to be confirmed and could slip into June.
The next dividend estimated to be due on the 6/5 is for TFIF and will be paid on the 29/5, so always DYOR as often published information is behind the curve
