I<\/span> often wax lyrical about bargain hunting among investment trusts<\/a> trading at a discount<\/a> \u2013\u00a0that is, trusts whose shares trade for less than Net Asset Value (NAV).<\/p>\n Think buying \u00a31 coins for 90p.<\/p>\n We\u2019ve also written reams over the years on investment trusts as a potential source of steady income.<\/p>\n Former Monevator<\/em> contributor The Greybeard<\/em> had a lot to say about it<\/a> \u2013\u00a0although he grew frustrated by the relentless pushback from hardcore passivistas<\/em>.<\/p>\n More recently I\u2019ve launched an investment trust income model portfolio<\/a> for Moguls<\/em> members.<\/p>\n I won\u2019t rehash the whole active\/passive debate with respect to income today. If you\u2019re a passive investor but you have an open mind, I\u2019ve written a Mavens<\/em> post<\/a> on using ETFs to do much the same.<\/p>\n But if you\u2019re a global equities tracker<\/a> and drawdown<\/a> diehard, probably best to wait for the next article!<\/p>\n Just briefly for those on the fence \u2013\u00a0or simply confused \u2013\u00a0I\u2019m not saying the average person would do better stock picking investment trusts to grow their capital.<\/p>\n I\u2019m not even saying they would do better \u2013 certainly not that they\u2019d see higher total returns<\/strong> \u2013 living off the natural yield from income investment trusts in retirement.<\/p>\n Rather, I see advantages to an actively managed income<\/a> approach (less stress and income volatility, no planned capital depletion, lower infirmity risk<\/a>) that make it worth considering. To the extent that I\u2019ll probably go down this route myself when I do throw my portfolio into decumulation<\/a> mode.<\/p>\n Okay, enough said. Let\u2019s now consider where my hobby of investment trust dumpster diving<\/a> could dovetail with an investor\u2019s income goals.<\/p>\n Firstly, a quick reminder about how discounts work<\/a>:<\/p>\n It\u2019s often the case that the share price of an investment trust trades at less than its NAV per share.<\/p>\n Remember, the NAV is \u2013 in theory \u2013 the best estimate of what the trust owns, minus any debts.<\/p>\n Clearly, buying shares for less than they are worth may present an opportunity. Price is what you pay but value is what you get, to quote Warren Buffett.<\/p>\n For instance, the fictitious\u00a0Monevator Investments\u00a0plc <\/em>may trade for \u00a31.20 a share, despite its NAV per share being \u00a31.60.<\/p>\n In this case, a buyer is getting \u00a31.60 of underlying assets for just \u00a31.20.<\/p>\n Bargain! The share is trading at a discount to NAV:<\/p>\n The\u00a0discount<\/strong>\u00a0is (\u00a31.60-\u00a31.20)\/\u00a31.60 = 25%<\/p>\n In principle, you get more for your money when you invest at a discount. Hopefully in time the discount will narrow, pulling the share price back up towards the NAV and amplifying your returns.<\/p>\n<\/blockquote>\n So much for \u2013 fingers crossed \u2013\u00a0capital gains from discounts.<\/p>\n But what about income?<\/p>\n The crucial thing to grasp is that any cash paid out by a trust is unaffected by the discount. Let\u2019s say Monevator Investments<\/em> has a NAV of \u00a31.60 per share, as above, and that it pays an annual 8p per share dividend.<\/p>\n If you were to calculate the yield based off the NAV, this represents a yield of 5%:<\/p>\n However this trust is trading at a 25% discount. We can buy the shares for \u00a31.20.<\/p>\n Yet the dividend payout is still 8p per share. So for someone buying the shares today in the market, the yield they\u2019ll get on their investment is:<\/p>\n All things being equal, this higher yield is locked in. Provided the cash payout remains at least 8p,\u00a0then this investor\u2019s annual yield on cost of their Monevator Investments<\/em> shareholding will be 6.7% \u2013 regardless of whether the share price rises or falls, or whether the discount closes.<\/p>\n Of course, dividends from decent income investment trusts tend to rise over time, as do their NAVs. Though sometimes dividends can be cut, too.<\/p>\n That\u2019s a discussion for another day. The point is the chunky discount here has boosted the purchasers\u2019 starting income yield, compared to if they were buying the shares at NAV \u2013 let alone a premium.<\/p>\n Note that in both cases \u2013 whether the shares are priced at NAV or at a 25% discount \u2013 the underlying assets (represented by the NAV) generate enough income for the trust to pay an 8p dividend per share.<\/p>\n When you buy for only \u00a31.20 due to the 25% discount to NAV, you are getting the same 8p at a cheaper price. But because each share costs only \u00a31.20 instead of \u00a31.60, the same lump sum investment would buy more shares \u2013\u00a0and therefore more of those 8p dividends.<\/p>\n For example:<\/p>\n Happy days.<\/p>\n Generally investment trusts trading on discounts don\u2019t draw attention to the fact. Their annual reports will wave their hands about what they\u2019re doing to close the gap, and direct your attention to graphs of rising NAVs over time, or photos of employees from portfolio companies curing cancer or drilling for oil.<\/p>\n So the following illustration in a recent presentation from an investment trust I hold \u2013 Canadian General Investments Trust (LON:CGI) stood out:<\/p>\n Source: Canadian General Investments<\/a><\/p>\n For a cluster of reasons we don\u2019t need to get into, Canadian General\u2019s whopping 40% discount to NAV is pretty much out of its control. While CGI has sometimes traded at NAV \u2013\u00a0usually during commodity booms\u00a0\u2013 a big discount is typical.<\/p>\n Hence management has a reason to turn this bug into a feature with this table. And what it\u2019s illustrating is exactly what I\u2019ve explained above.<\/p>\n The table simplistically assumes a 10% annual return \u2013 high but less than CGI\u2019s long-term track record \u2013 split between 7% capital gains and a 3% dividend. All the income is presumed to be paid out.<\/p>\n If you were to buy $100,000 of Canadian General as a hypothetical open-ended \/ mutual fund \u2013\u00a0that is, with no discount \u2013\u00a0then for your hundred grand you\u2019d get $3,000 paid out as a dividend income.<\/p>\n However at a 40% discount to NAV, your $100,000 is buying you $166,667 of Canadian General\u2019s assets:<\/p>\n Your income is higher from day one, just as we\u2019ve already seen in my example above. <\/p>\n From there, the company compounds NAV at 7% and holds the 3% payout (of NAV) steady. The discount stays at 40%:<\/p>\n By year 20:<\/p>\n We can also work out the ongoing yield on cost of your initial $100,000 investment:<\/p>\n A very nice income if you can get it.<\/p>\n There\u2019s plenty of slips betwixt cup and lip and all that. Dividends can be cut. Canada is an odd place to put a lot of your money. Canadian General\u2019s exposure to US assets muddies the picture.<\/p>\n But that\u2019s all for another discussion. Here I\u2019m just focused on the mechanics of discounts and income.<\/p>\n You see, readers often ask me why I should expect a discount to close.<\/p>\n The simplest answer is that most usually do, eventually, at least for a time and in the absence of structural impediments such as those at Canadian General.<\/p>\n But the point here is that if you\u2019re an income investor after natural yield, then it doesn\u2019t matter. You can simply aim to buy and lock-in a high starting yield and then let the income roll in. (Touchwood!)<\/p>\n Unfortunately, the top flight of dedicated UK equity income trusts rarely if ever trade for anywhere near 25% discounts. Their income underpinnings, steadier investments, and decent long-term records tend to curb such extreme dislocations.<\/p>\n However they can reach discounts of 10% or so when out of favour, or in wider times of distress<\/a>.<\/p>\n Still, the same income-enhancing argument holds for more specialist trusts, too, where we have seen much chunkier discounts.<\/p>\n For years even income seekers bought infrastructure trusts on a premium, for reasons I never understood. However as I covered<\/a> on Moguls<\/em>, in early 2025 they were trading on 25-30% discounts. That meant income yields of 8% or more for new money buying the likes of HICL (LON: HICL).<\/p>\n Such super-wide discounts have now closed, though you can still bag HICL at a 15% discount. (Disclosure: I hold.)<\/p>\n Property trusts and many REITs are still on big discounts to NAV, for what that\u2019s worth<\/a>.<\/p>\n And there remain a few \u2013 troubled \u2013 renewable trusts on big discounts touting very high yields for the brave.<\/p>\n Despite misgivings<\/a>, I\u2019ve dipped a little toe in with Greencoat UK Wind (LON: UKW), currently on a 22% discount and yielding 10%.<\/p>\n Infrastructure, property, and even renewable investment trusts have all traded at premiums to NAV in the past. I\u2019m not saying they will again (especially not renewables). But as we\u2019ve seen, for braver income seekers that might not matter, just so long as the dividends keep flowing.<\/p>\n Still, I\u2019m more confident about the very long-term with Ye Olde UK equity income trusts \u2013 those of the much-vaunted (and debated) Dividend Hero<\/a> variety.<\/p>\n Anything else is a bit of a special situation when it comes to long-term income.<\/p>\n And yes, to belabour the point: this is active investing<\/strong>. Nobody needs to pipe up that a global tracker will outperform in the long run or that discounts might be flagging bigger risks or mention Neil Woodford. <\/p>\n I get it and I mostly agree. So should anyone who goes down this path. Do your own research<\/a>!<\/p>\n But personally, I\u2019m starting to think I might smooth the transition from accumulation to decumulation by opportunistically buying \u2013\u00a0and then looking to hold \u2013 these income trusts as I head towards drawdown.<\/p>\n That would probably be much less stressful than switching overnight from an accumulation to decumulation portfolio \u2013 albeit likely at some cost to my returns.<\/p>\n Indeed as I get closer to the end than the beginning, I have started making tentative stabs at building up a natural yield again. Ironically this takes me back \u2013\u00a0philosophically \u2013 to where I started<\/a> as an investor.<\/p>\n True, I\u2019m still finding it hard not to trade when the discounts close, or some other shiny object pops up\u2026<\/p>\n But as I transition at least a chunk of my portfolio towards income, maybe that illustration from Canadian General will help me stay my hand.<\/p>\n<\/p><\/div>\nGive peace a chance<\/h4>\n
Discounts and income from investment trusts<\/h2>\n
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Yielding to the discount<\/h3>\n
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A striking hypothetical example of higher income returns<\/h4>\n
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Discounts are a bonus for income investors<\/h2>\n
Buy in the sales<\/h4>\n
Looking to the long-term<\/h4>\n