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For those getting started investing for passive income, I think investment trusts can provide a firm foundation.
Such trusts give us the thing I think is most important when we’re starting out — diversification. And they typically go for a specific strategy — in this case I’m looking for equity income. So with the cash spread across dozens, or even hundreds, of companies, we get the diversification right from the start.
Which of the many investment trusts in the UK stock market did ChatGPT suggest I should think about?
Smarter searches
First, a caution. Large language models (LLMs) provide a next step in searching web-based data. And they can narrow down some candidates a lot faster than the old-fashioned way.
But because of the way they’re pre-trained on large data dumps, they can be out of date. And as they don’t have any actual understanding, they can get things wrong.
In this case, I was given some dividend information that was well past its sell-by date. And some that was just plain wrong — and not supported by the source it allegedly came from.
A mixed selection
Still, I’ve been following investment trusts for a long time. And ChatGPT managed to unearth a few possibilities to consider that I’d overlooked.
One is the Henderson High Income Trust (LSE: HHI), currently offering a forecast dividend yield of 6.2%. For a diversified investment trust, that’s one of the highest yields I know. At least, I do now.
My AI helper also told me it hadn’t cut its dividend in the past decade. I checked — because we need to check anything LLMs tell us. And sure enough, the Association of Investment Companies has it in the potential next generation of its Dividend Heroes, having raised its dividend for 12 years in a row. It’ll need to reach 20 years to attain the coveted Hero status.
What you get
The trust invests approximately 80% in the FTSE All-Share index. And its list of top investments reads as if I’d asked ChatGPT “which are the UK’s most popular long-term dividend stocks?“
British American Tobacco, HSBC, Lloyds Banking Group, National Grid… are all in the top 10.
An investment trust like this is still at risk in a general stock market fall. And investors might like to split their money across different managers for an added bit of safety. Merchants Trust is among my favourites, managed by Allianz and on a 5.2% yield. That one’s increased its dividends for 43 straight years.
Spice it up
What about looking for bigger dividends, and being prepared to take on a bit more risk to chase them? ChatGPT highlighted Montanaro UK Smaller Companies Investment Trust, and its expected 6.9% yield.
There’s more risk with smaller companies, and this one cut its dividend in 2023. And some smaller-company trusts themselves have small market caps, which can increase the risk of volatility.
But in all, there’s a great range of UK investment trusts that passive income investors could do well to consider for long-term dividend returns.