Most investors pay income tax but relatively few exceed their annual capital gains tax (CGT) allowance. So why not maximise the benefit you receive from this most flexible of tax shelters by popping income-generating shares into your individual savings account (ISA)? You could enjoy 5% annual income or more, although not guaranteed, from a variety of investment trusts held in an ISA.
You can receive tax-efficient income and tax-free growth from an ISA without any minimum holding period - and there is no minimum age before you draw cash. You can also shelter assets in an ISA from almost any recognised stock exchange, which brings a world of opportunities within reach.
Best of all for income-seekers, investment trusts have the unique ability to smooth out some of the shocks of the stock market by retaining up to 15% of returns in good years to sustain dividend distributions to shareholders in bad years. That’s how some leading investment trusts have succeeded in raising their dividends every year for several decades.
Here, we take a look at some of the J.P. Morgan Investment Trust options that could be held in a Stocks & Shares ISA.
GREAT BRITISH RISING INCOME
Dreams of capital growth can disappear on a bit of bad news but several investment trusts have delivered many years of rising income, despite stock market shocks elsewhere along the way. JPMorgan Claverhouse (stock market ticker: JCH) and JPMorgan Elect - Managed Income (JPEI) both invest in ‘blue chip’ or large and long-established British businesses, such as the energy giants, Royal Dutch Shell and BP; the pharmaceutical groups, AstraZeneca and GlaxoSmithKline; and the Marmite-to-Magnum ice cream global food and drink business, Unilever. As of 7th February 2021, the dividend income that JCH pays to shareholders produces a yield of 4.7% and JPEI’s yield is 5%.
Stock market fluctuations - or share prices moving up and down - are unpredictable but a decent dividend yield can pay investors to be patient. While dividends are not guaranteed and the past is not a reliable indicator of the future, the fact that JCH has increased its dividends every year without fail for 48 years is noteworthy. Such sustained success is the reason that the Association of Invtment Companies (AIC) has awarded JCH its prestigious accolade of “dividend hero”. JPEI was launched more recently (in 2000 compared to 1963 for JCH) but, with the same caveat on past performance, has increased its dividends every year for the last 10 years. That achievement has earned JPEI a place in the select band that the AIC dubs its “next generation of dividend heroes”.
Better still for investors seeking income that can rise over time, including many people preparing for retirement, the dividends paid by JCH have risen by an annual average of 6.5% over the last five years, according to independent statisticians at Morningstar. If that rate of increase is maintained, which is not guaranteed, JCH shareholders’ income would double in just over 11 years. If JPEI sustains its average annual rate of increase over the last five years, 4.3%, it would take 16 years and nine months to double shareholders’ income.
EUROPEAN EQUITY INCOME
Britain has left the European Union but there is no need for British investors to overlook opportunities on the Continent. As of 7th February 2021, JPMorgan European Income (JETI) delivers a dividend yield of 5% from a portfolio that includes the Swiss medicines group, Roche, and the same country’s world-leading food giant, Nestle; the German engineer, Siemans; and the French pharmaceutical group, Sanofi. These equities - another name for shares - have helped raise the income paid to JETI shareholders by an annual average of 7.1% over five years. While dividends and yields are not guaranteed - and past performance is a poor predictor of future results -, if that rate of increase is maintained, shareholders’ income would double in just over a decade.
EMERGING MARKET INVESTMENT TRUST OPTIONS
Investors willing to accept higher risks in pursuit of higher returns might consider emerging markets - such as Brazil, Russia, India and China. Professional fund management can be particularly valuable in volatile markets where corporate governance and financial regulation may not always match standards expected in more developed economies.
For example, JPMorgan Emerging Markets (JMG) holds a global portfolio of shares that few British investors would buy directly - such as the digital chips-with-everything giant, Taiwan Semiconductors; the Chinese online groups Tencent and Alibaba; and the Latin American internet retailer, MercadoLibre. Although investors should not solely base their decision on the past record, to date, the risks have been justified by rewards with JMG delivering total returns of 39% over the last year, 193% over the last five years and 175% over the last decade. JMG yields only 1% dividend income but this has risen at an annual rate of nearly 19% over the last five years.
STOCKS AND SHARES ISA FOR GROWTH AND INCOME
You don’t need to go all out for growth or income when choosing your Isa; you can take a balanced approach in a bid to achieve both. For example, Mercantile (MRC) investment trust has total assets of £2.29bn and aims “to achieve long-term capital growth from a UK portfolio of medium and smaller companies with dividends at least in line with UK inflation.”
MRC yields 2.7% dividend income that has risen by an annual average of 10% over the last five years. If that rate of increase is sustained, which is not guaranteed and the past being of uncertain validity as a guide to the future, shareholders’ income would double in just over seven years. MRC’s total returns were negative last year - they shrank by 5.1% - but were positive at 71% over five years and 199% over 10 years. This investment trust was launched in 1884, so it has survived both World Wars and the Great Depression, among other crises.
USE IT OR LOSE IT
Don’t forget the ISA allowance is annual, which means it expires each year at midnight on April 5. So it really is a case of ‘use it or lose it’. J.P. Morgan investment trust range is available through all major investment platforms.
All information accurate on February 7, 2021.