Income Investing: an investment trust jargon buster - The Lolly from ...

Investment trusts or companies are one of the three main types of investment fund available to private investors (the others are unit trusts or 'open-ended investment companies' and exchange traded funds or ETFs).

Investment trusts have some big advantages over their rivals but they are more complicated to use.

In our second Investment Trust Jargon Buster I look at the main terms you need to know to use investment trusts to generate an income.

This video is part of the The Lolly Investor Programme, a weekly series aimed at beginner investors.

You can also watch our first Investment Trust Jargon Buster and other recent Lolly Investor Programmes.?

Generating an income from investments in shares is another area in which investment trusts and investment companies excel.

Here are the key terms you need to know.

First of all, this investment approach is called equity income. Equity is another name for share.

We?re talking about investment trusts buying shares in companies that pay good dividends.

There are other investments from which income can be generated ? bonds and property for example ??but we?re focusing on the income from shares.

Essentially equity income investment trusts collect dividends from the companies they invest in and distribute it to their shareholders via their own dividends.

Equity income investment trusts are divided into different sectors.

Some invest only in the UK, some overseas. Some aim to generate a high income and, others will pay a lower income but will aim to grow your capital as well.

This is stock market investing so nothing is guaranteed. Your capital is at risk and dividends can be cut or scrapped if times are tough.

Generally investment trusts have a good record in growing dividends over the years.

This is because, unlike other types of investment fund, they don?t have to pay out all their investment income. In good years they can put a bit aside and create a revenue reserve to top up the payouts in lean years.

Investment trusts pay dividends at least twice a year, although a growing number pay them once a quarter and even monthly to make life easier for investors.

You can get an idea of how much income an investment trust will pay by looking at its yield. The yield represents how much income you could get from buying the shares at their current price.

Most investment trusts quote an historic yield based on the dividends paid in the past 12 months.

For example, an investment trust pays two dividends in a year of 5p and 3p. That?s a total of 8p per share. If its share price is 200p the investment trust yields 4% as 8p is 4% of 200p.

High yielding investment trusts can become very popular. Their share price can rise above the net asset value of the investments they hold. This is a called a premium. If the premium becomes too large there is a risk the share price could fall, exposing investors to a capital loss.

Often in this situation an investment trust will issue more shares to reduce their price. However, as a general rule investors should avoid trusts on big premiums.

Source: http://citywire.co.uk/money/income-investing-an-investment-trust-jargon-buster/a692560

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