When markets are volatile and the value of your portfolio is moving around on a day-to-day basis there can be some comfort to take from investments which offer a steady stream of income.

The problem is, dividends can sometimes cut or cancelled in the face of uncertainty. Investment trusts, also referred to as closed-ended funds, can like other funds mitigate this risk by investing in a diversified basket of dividend-paying stocks.

As a consequence, they aren’t too impacted by an individual company cancelling or cutting its payout.

SOMETHING IN RESERVE

Perhaps more significantly, trusts are also permitted to allocate up to 15% of their income to a revenue reserve.

This reserve is intended to support dividend payments during periods of financial difficulty, and as a result many investment trusts have a long-standing history of providing shareholders with consistent dividend growth.

As such, trusts can be attractive to income investors during periods of wider turbulence.

To help with generating some ideas, we have screened the investment trust universe for equity-focused trusts which yield more than 4%. We have also limited our search to names with ongoing charges of 1% or less so not too much of the trust’s performance is being lost to fees.

Unsurprisingly, the Association of Investment Companies, UK Equity Income sector is well represented. The UK market is traditionally a good source of income and its lowly valuation relative to other global markets means some attractive yields are on offer.

Among the highest-yielding names in this space is The Merchants Trust (MRCH). Founded in 1889, the trust’s current manager Simon Gergel looks to deliver a high and rising income together with capital growth through a policy of investing mainly in higher-yielding large UK companies.

Another high-profile name from the same grouping is City of London (CTY) which has one of the longest dividend increase streaks of any investment trust, having increased its payout for a 58th consecutive year in September 2024.

In other words, last time it didn’t hike the dividend, England was preparing to host an ultimately successful World Cup.

There are several Asia-focused names on the list, although investors may be approaching them with some trepidation given the potential impact on the region from the current US trade policy.

GROWTH AND INCOME

Interestingly there are three trusts in the table which follow JPMorgan’s well-regarded ‘Growth & Income’ strategy, including highly popular vehicle JPMorgan Global Growth & Income (JGGI) as well as the European and Asian iterations.

These trusts look to achieve a blend of income and growth by investing across both defensive and cyclical stocks.

Outliers from our list include BlackRock World Mining Trust (BRWM), which despite dividend cuts in the mining sector is still able to deliver a pretty generous stream of income to holders, and Montanaro UK Smaller Companies (MTU).

Small-caps are not as well known for paying out dividends as their large- and mid-cap counterparts but Montanaro recently committed to distributing 1.5% of its net asset value each quarter, up from a previous level of 1%.

Dividends are funded through a mix of capital reserves and current year revenue. There is enough capital to maintain this dividend level for years, even assuming no capital gains or income in the underlying share portfolio.

The trust, which was among those targeted by Saba earlier this year in a forlorn attempt by the US activist hedge fund to seize control, also announced a £20 million buyback earlier this year.

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