Investing for income offers investors a degree of consistency even in uncertain markets. Investment trusts are particularly well suited to this approach due to their closed-ended structure which helps support more stable and sustainable income distributions over time.
Investing to provide a stream of income (typically listed company dividends or corporate bond interest payouts) has historically been a strategy for retired people financially reliant on their pensions and other investments. But the past two decades have seen big changes for income investing, in several respects.
Part of the story is a structural one. Most private sector businesses have wound up the costly final salary pension schemes1 that provided financial security for retirees (or closed them to new members).
Employees are consequently now largely reliant on investment-based defined contribution schemes, which leaves them (rather than the employer) shouldering investment risk and uncertainty.
Moreover, they are not saving enough into these schemes: a 2023 IFS report2 found that 60% of private sector employees were tucking away less than 8% of their earnings, and almost 90% contributed less than the 15% recommended by the Pension Commission.
Overall, the onus has shifted to individuals to make long-term financial provision for themselves, through ‘DIY’ investing into ISAs and SIPPs as well as workplace pensions.
Income investing for every generation
Income-focused investing might be a natural choice for retirees, but it can work equally well for younger investors who maybe in other circumstances would not have been motivated to think about investment markets or portfolios.
For a start, the companies in a position to pay out dividends to shareholders tend to be relatively well-established and stable, so, although not guaranteed, their shares are generally less volatile than those of companies focused on reinvesting for growth.
Secondly, even when times are tough and markets are falling, robust dividend-paying businesses tend to be reluctant to cut or suspend payouts. That means investors generally still receive some reward when their shares aren’t gaining value.
The UK has long led the world in corporate dividend culture, focusing on growing payouts over time. Average UK dividends typically grow at a rate above inflation: the median growth rate for Q1 2025 was 3.3%, according to Computershare’s latest UK Dividend Monitor3. Again, that provides investors with an element of financial reassurance that they’ll be able to keep up with rising prices.
And if you’re still working and don’t need to take cash from your investments, an income focus can be a genuinely rewarding choice because of the power of compound growth over time.
Put simply, reinvested dividends are used to buy more shares or units of investment, which in turn has the potential to produce capital growth and generate dividends that are ploughed back into additional shares, and so on. Over the years, the impact of those reinvested dividends on your fund increases exponentially.
Why a closed-ended fund?
Clearly, then, an income focus can work for anyone - but how best to access the right investments?
There are specific advantages in this regard to choosing investment trusts. A trust’s closed-ended structure means that it is structured as a listed company and a set number of shares are issued (hence the ‘closed-ended’ epithet), the value of which is determined on the stock market by investor demand and supply.
That means managers can distance their investment decisions from investor sentiment and take a long perspective where appropriate, because the share price, rather than the underlying assets, bears the direct brunt of market volatility.
(In an open-ended fund, in contrast, investors’ money flows directly into or out of the fund coffers: fluctuations in demand can provoke a run on a fund and limit the manager’s freedom to invest for the long term.)
As a company, the trust is also allowed to hold back up to 15% of the dividends it receives from its portfolio holdings. (Again, an open-ended fund doesn’t have this capacity: it is obliged to pay out all its earnings to shareholders each year.)4
By holding back some dividends over the years – particularly when companies are doing well and distributions are generous – the trust’s managers have a buffer of reserves from which they can supplement its own payouts in leaner years.
That helps them keep income volatility to a minimum and produce a reliable and growing investment income for its shareholders - an invaluable benefit for retirees who live off the proceeds of their SIPPs and ISAs.
The Association of Investment Companies (AIC) has long recognised the value to investors of a dividend policy they can count on.
Back in 2009, the AIC launched the Dividend Heroes ranking, comprising those investment trusts that have not cut dividends for 20 consecutive years or more. The kudos now attached to a place on the list means that boards of qualifying investment trusts have become increasingly reluctant to cut their dividends in anything but the most extreme circumstances.
There are now 20 AIC Dividend Heroes, half of which have increased dividends every year for 50 years or more. UK equity income trust JPMorgan Claverhouse is a prime example, with a 52-year record and annualised dividend growth of more than 4%5.
Meanwhile its sister trust The Mercantile, housed in the UK All Companies sector, has a place on the AIC’s ‘next generation’ Dividend Heroes list, with 11 consecutive years of dividend growth under its belt and a 3% dividend5.
Payout commitments
Some investment trusts have adopted a rather different route to dividend commitment, with an ‘enhanced dividend’ policy – a promise to pay a set percentage (say, 4%) of the previous year’s net asset value on a certain date, drawing on a mixture of dividend earnings and capital or income reserves.
This generally involves a ‘total return’ mandate that prioritises overall fund performance. It means, among other things, that the managers don’t need to focus primarily on investing in big dividend payers, and instead have the luxury of building a portfolio of the very best businesses with the strongest prospects of earnings growth – not all of which are necessarily making large payouts.
The JPMorgan stable of investment trusts includes several that are actively putting the requirements of private shareholders front and centre through enhanced dividends.
For example, JPMorgan Asia Growth and Income announced in February that it will increase its enhanced annual payouts from 4% to 6%, paid quarterly. JPMorgan Global Growth and Income has operated a 4% enhanced dividend policy since 2016, while JPMorgan Indian has recently introduced a similar commitment to 4% distributions.
It’s important to recognise that the long-term success of these innovative income policies depends on the quality of the trust and its ability to deliver strong overall performance over a longer timeframe. Additionally, people looking to invest need to appreciate all forms of investing, not just investing in investment trusts, carry risks with markets going up and down, and returns not guaranteed.
Ultimately, income-focused investors need to ensure they have done their research and understand the mechanics of the investment trust they have selected, as well as their associated risks; but a well-chosen trust can provide a meaningful and reliable income stream.