To generate around £800 a month in tax-free passive income, I need ISA savings of £240,000. How do I know that? Thanks to an often overlooked investment benchmark called the 4% rule. Put simply, this states that if I withdraw 4% of my retirement portfolio as income each year, my pot will never run dry.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

How I’m building a passive income for retirement

The 4% rule assumes average investment growth of 7% a year, including dividends. If I withdraw 4% a year and inflation averages 3%, my portfolio will stay roughly the same size. Of course, none of those figures are guaranteed, but a target of £240,000 in ISAs looks just about doable, at a stretch. And 4% of that is £9,600 a year, or £800 of monthly passive income. It’s not riches, but it’s better than relying purely on the State Pension.

So much for rules. I will also have to knuckle down and build enough ISA savings to generate my target income. There’s still a way to go, but I’m taking advantage of current stock market volatility to top up my portfolio. I need to act fast, because the annual ISA deadline is just one month away, at midnight on 5 April.

The FTSE 100 is one of the best stock markets in the world for dividends, and I’m underpinning my portfolio with a couple of top equity income funds. I’m a long-standing fan of the City of London Investment Trust, and it’s about time I bought it. Its current yield is a rather splendid 4.48%. The ongoing charge is just 0.38%, so I’d get to keep most of that juicy passive income for myself.

I’m also investing in FTSE 100 stocks

City of London has even started to generate some growth, as the FTSE 100 swings back into favour, rising 15.4% in a year. I’ve been investing in the Rathbone Income fund for years. Its yield is lower at 4.06% and charges are higher at 0.75%, so I may rethink this choice, but it has grown steadily for the 15 years I’ve held it, and I’m reluctant to let it go.

To generate the rest of my passive income, I would look to build a portfolio of individual FTSE 100 stocks. I like the look of Lloyds Banking Group right now, as rising interest rates should boost its net lending margins. Yet it still trades at a dirt-cheap P/E of just 6.1 times earnings. The dividend yield is now 4.34%, and I expect that to continue climbing.

Oil giants BP and Shell are rising along with the oil price, and I’d buy them both, along with passive income heroes including mining giant Rio Tinto, financial firms M&G and Phoenix Group Holdings, housebuilder Persimmon and mobile phone operator Vodafone.

Of course, I have to remember that each of these stocks comes with risks, both sector- and company-specific. But I feel that owning a basket of them mitigates some of the risk for me.

I hope that the 4% rule will serve me well when the time comes to retire.

The post I’m targeting £800 a month passive income from dividends thanks to this forgotten rule appeared first on The Twelfth Magpie.

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Harvey Jones holds Rathbone Income but has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A lot of people spend their time worrying about the State Pension, but don’t do anything about it. Avoid falling into that trap. Instead, look to build the money you need to enjoy a comfortable retirement, by investing in UK shares.

Nobody makes a fortune on the stock market overnight, despite what many people think. It takes time and effort. So if you have money to spare, don’t leave it any longer.

Don’t worry about retirement, do something

I would suggest backing up the State Pension by investing in the following two FTSE 100-listed investment trusts. These are companies whose business is managing a balanced portfolio of shares for income and growth.

The biggest and best known is Scottish Mortgage Investment Trust (LSE: SMT), which now runs £14.3bn worth of assets. Over the last five years, it has smashed the FTSE 100 and almost every other UK investment fund, with a total return of 300%.

It has largely done this by making a big call on the buoyant US stock market. More than half the fund is invested in the US, in big names such as Tesla, Amazon, and Netflix. As a result it has benefited from the tech boom.

It isn’t just a US fund, though. Roughly a fifth is invested in China, notably tech giants Tencent Holdings and Alibaba Group, and slightly less in Europe. If you mostly hold UK shares or funds, that could give you some much-needed diversification, away from your State Pension.

As with any fund, Scottish Mortgage may not always outperform. Also, it offers only a tiny dividend yield, just 0.34% a year.

Income on top of your State Pension

If you want income, you could balance this with the UK’s second-biggest investment trust City of London Investment Trust (LSE: CTY). This equity income fund yields a whopping 5.86% a year, mostly from renowned FTSE 100 dividend-payers such as British American Tobacco, Diageo, Unilever, GlaxoSmithKline, and Royal Dutch Shell. Scottish Mortgage gives you global growth, City of London gives you UK income.

If you invest a regular monthly sum in both, you should steadily build your wealth over time. When you retire, you could draw the natural yield from City of London to provide the income you need to top up your State Pension.

You can take lump sums from Scottish Mortgage, as and when. Remember, if you invest inside a Stocks and Shares ISA, both income and growth will be free of tax.

If you invest in these two funds, you can start building the wealth you need to reduce your reliance on the State Pension.

The post Forget your State Pension worries! I’d buy these 2 investment trusts to retire rich appeared first on The Twelfth Magpie.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon, Netflix, and Tesla. The Motley Fool UK has recommended Diageo, GlaxoSmithKline, and Unilever and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This tiny amount of income does not even beat inflation, and with that being the case, I think now could be the time to dump your Cash ISA and invest in investment trusts instead.

The great thing about investment trusts is that they are companies in their own right, and there is no obligation for them to pay out dividends received from their portfolios to shareholders. 

This means trusts can hold some money back in the boom years, to maintain payouts in the lean times. This flexibility has helped some trust achieve dividend track records of as long as five decades.

Record-holder

The City of London (LSE: CTY) has one of the most impressive dividend records of any investment trust. It has been paying and increasing its distribution for 53 years now. 

Managed by Job Curtis, who has been running the fund since 1991, City of London’s portfolio is dominated by high-quality blue-chip stocks. For the 10 years to the end of September 2019, the trust produced a total return for investors of 177.7%, outperforming its benchmark by 45.3%. 

The company owns 97 holdings in its portfolio and charges just 0.39% per annum in fees. That’s nearly half of what Neil Woodford was charging for his flagship Equity Income Fund.

At the time of writing, City of London supports a dividend yield of 4.5% and trades at a slight premium of 3.2% to net asset value.

Multi-manager

Shires Income (LSE: SHRS) is my next income investment trust pick. Unlike City of London, this company invests in other managers as well as fixed income securities and traditional equities. 

The top holding in the portfolio is the Aberdeen Smaller Companies Income Trust, and the next four holdings are all high-yield preference shares. Around 30% of the portfolio is allocated to fixed income. 

This focus on high-yield securities means Shires offers more in the way of income for investors.

At the time of writing, shares in the company offer a dividend yield of 5%. It charges an annual management fee of around 1% with all costs included, and currently trades at a discount to net asset value of 1%.

Emerging income 

The final investment trust that I’m going to profile is the Henderson Far East Income Trust (LSE: HFEL).

With a dividend yield of 6.2% at the time of writing, this trust supports the highest yield in this piece. It is currently trading at a premium to net asset value of 1.5% and charges an annual management fee of 1.1%. 

Launched in May 1930, the goal of the Far East Income trust is to provide shareholders with a growing annual dividend and capital appreciation from a portfolio of investments across the Asia-Pacific region.

Top holdings include Macquarie Korea Infrastructure Ord and China Construction Bank. So, if you are looking to diversify your portfolio away from the risk of Brexit, this company might be the perfect vehicle to do so.

Around a quarter of the portfolio is invested in Chinese stocks, with a further 17% in Australian shares and 13% in Singapore-listed equities. The trust’s performance over the past 10 years has been highly impressive. Including dividends paid to investors, the share price has produced a total return of 127%.

The post Forget a Cash ISA! I’d rather get a 5% yield from these 3 investment trusts appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Today, I’m looking at two investment trusts that I believe could be ideal for investors in their 50s. Both trusts have a strong focus on FTSE 100 dividend stocks and therefore offer the potential for capital growth and income, but are also managed quite conservatively, meaning they are lower risk.

City of London Investment Trust

The City of London Investment Trust (LSE: CTY) could have a lot to offer investors in their 50s, in my opinion.

For starters, portfolio manager Job Curtis – who has managed the trust for nearly 30 years now – takes a cautious approach to investing, generally focusing on well-established, dividend-paying companies (top holdings in the portfolio at the end of 2018 included Shell, HSBC, BP, Diageo, and Unilever) and never taking unnecessary risks. This style of investing is well suited to older investors as it can offer downside protection when markets are falling. A look at recent performance shows that the trust outperformed its benchmark in the second half of 2018 when global equity markets declined.

Furthermore, the trust offers a nice yield of around 4.5% at present, meaning investors can pick up a healthy level of income from the investment, and it also has a fantastic dividend growth track record, having increased its payout every year for over 50 years now, which is an excellent achievement.

With fees of just 0.41% per year, I see CTY as an excellent core holding for investors in their 50s.

Merchants Investment Trust

Another investment trust that I believe is well suited to investors in their 50s is the Merchants Investment Trust (LSE: MRCH). This mainly invests in large, well-known FTSE 100 companies with the aim of providing investors with a high level of income, plus income growth and some long-term capital growth. Its top holdings at the end of 2018 were Shell, GlaxoSmithKline, HSBC, Imperial Brands, and BP.

What I like about MRCH is that the portfolio manager Simon Gergel is extremely focused on dividends. That makes it a good choice for older investors who aren’t far off retiring, as dividends could potentially be used for income in retirement. The trust currently offers a high yield of around 5.4%, meaning that a £10,000 investment could generate dividends of £540 per year (not guaranteed of course). And like CTY, it also has a good dividend growth track record, having increased its payout for 36 consecutive years now.

With ongoing charges of a reasonable 0.59% per year, I think Merchants Investment Trust could definitely be worth considering if you’re in your 50s and looking for lower-risk investments.

The post In your 50s? I think these low-risk investment trusts are worth a look appeared first on The Twelfth Magpie.

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• 236 years of dividend increases! So are these 4 amazing investment trusts good for passive income?

Edward Sheldon owns shares in City of London Investment Trust, Royal Dutch Shell, Imperial Brands, GlaxoSmithKline, Unilever and Diageo. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended Diageo, HSBC Holdings, and Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

In fact, according to data provider FE, Lindsell Train is by far the best performing trust in its sector and among the top performers of any trust in the UK. 

The trust has returned a staggering 678% over the past 10 years. For comparison, an investment in the FTSE 100 has produced a total return of only 80% over the last five years. 

This strong performance is down to the investment skill of fund manager, Nick Train. Train sits alongside Neil Woodford as one of Britain’s best-known fund managers, thanks to his outstanding investment performance and astute bets on high-quality businesses.

Buy the best 

Train’s best quality is his long term focus. While other fund managers might chase story stocks, Train is happy to invest in high-quality businesses that slowly grind out growth. He’s looking for businesses with good cash flows that the managers believe will grow steadily. He also stays away from high-growth companies, including technology stocks, which can deliver outstanding returns but can also quickly fall from favour. 

Buying high-quality businesses and holding for the long term is something we at the Motley Fool are keen supporters of, which is why I believe backing Train can help you retire early. 

That said, I’m concerned about the trust’s current valuation. 

Would Train buy Train? 

Unlike other investment trusts and open-ended investment companies, Lindsell Train has a relatively limited number of shares in issue and doesn’t issue more stock to satisfy the needs of buyers. 

As a result, due to popular demand, shares in the trust now trade at a premium of 34% to the underlying net asset value of 788p (as of June 6) as investors have been willing to pay whatever it takes to participate in the story. 

Over the past five years, as shares in the trust have returned 253%, underlying net asset value has increased only 201%. Over the past six months, the performance gap is even wider. Underlying net asset value has increased by just 10%, compared to a 22% gain in the company’s quoted shares. 

This leads me to ask the question, would Train, who is known for his modus operandi of buying out-of-favour companies at discount valuations, buy Train? 

The answer to this question is probably no. But this doesn’t mean you should avoid the trust. Indeed, this isn’t the first time it has traded at a significant premium to net asset value. The same scenario occurred in 2016. However, Train’s investment skill managed to right the balance and even those who bought at the peak in 2016 would now be sitting on profits of more than 50%. 

Income and growth 

Train’s investment performance, coupled with The City of London’s (LSE: CTY) income profile, could make a powerful combination. 

While Train’s fund has shot the lights out in recent years, City has produced a more mediocre performance, achieving a capital gain of 52% over the past five years. Where the company really excels, however, is its dividend yield, which currently stands at 4%. 

The bulk of the portfolio is allocated to high-quality FTSE 100 income stocks such as BP and HSBC. As elephants rarely ever gallop, the chances that this portfolio will match Train’s in terms of performance, are low. 

Nevertheless, what I really like about this investment trust is its stability. This company should be able to provide you with a steady stream of income, through the good times and the bad. Because the portfolio is devoted to high-quality blue-chips, even in bear markets it should be able to continue to produce a steady income stream for investors, making it the perfect retirement asset. 

The performance of this income champion can only be improved by combining it with a growth fund such as Train’s. In my opinion, this mix of income and growth will almost certainly help you build a fortune in the stock market and quit the rat race early.

The post Can the Lindsell Train Investment Trust help you retire at 55? appeared first on The Twelfth Magpie.

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• 236 years of dividend increases! So are these 4 amazing investment trusts good for passive income?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, for long-term investors such periods of time can present buying opportunities. The track record of the stock market shows that there has been a recovery from all corrections and crashes. While this can take time, buying during an uncertain period can increase potential returns.

With that in mind, here are two investment trusts which could be worth buying right now. They could help an investor to gain access to a range of stocks, and benefit from the recent market downturn.

Improving outlook

Reporting on Friday was City of London Investment trust (LSE: CTY). It has enjoyed a relatively positive half year to 31 December, with its net asset value per share rising by 4.2% versus its level at 30 June. Its overall performance was slightly better than the UK equity income benchmark, although following the recent stock market correction, it is still down 2.1% during the last six months.

During the period, the company increased its exposure to oil and gas companies such as BP and Shell. This seems to be a sensible move, since both stocks offer relatively high dividend yields and are set to benefit from an increasing oil price. Furthermore, the company’s position in housebuilders was its larger sector contributor to relative performance during the period. With generally favourable conditions set to continue, housebuilders could deliver further growth.

With a dividend yield of 4.2%, City of London Investment Trust could be a worthwhile income holding over the medium term. Although it now trades at a premium of 2.5% to its net asset value, it continues to be well-run and could post relatively strong total returns in the long run.

UK focus

Also offering upside potential is the Schroder UK Mid Cap (LSE: SCP) investment trust. It has been able to outperform the UK all companies benchmark in the last year, with its returns being 14.3% versus 8.2% for the benchmark. However, it still trades at a discount to its net asset value, with the current discount being just under 15%. This suggests that there could be upside potential from its valuation alone.

Looking ahead, the prospects for UK-focused companies could be uncertain. Brexit talks continue and the UK is little over a year from leaving the EU, transition period aside. This could mean that some of the company’s major holdings may experience a period of volatility over the medium term.

While this may affect its performance somewhat, many UK-focused mid-caps may be undervalued at the present time, owing to the potential impact of Brexit. As such, now could be a good time to buy a range of them through the Schroder Mid Cap investment trust.

The post Looking to invest £1,000? Here are two investment trusts to consider appeared first on The Twelfth Magpie.

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• 236 years of dividend increases! So are these 4 amazing investment trusts good for passive income?

Peter Stephens owns shares in BP and Shell. The Motley Fool UK has recommended BP and Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The best strategy for novice investors, in my view, is to invest in a fund. That way, your money will be spread out over a whole portfolio of stocks, meaning your risk is reduced significantly.

There are several different types of funds available today, including mutual funds, investment trusts and exchange-traded funds (ETFs). I explained the differences recently here. Today, I’m looking at two investment trusts that I believe are strongly suited to those just starting out. Both can be bought and sold just like regular stocks through an online broker.

The City of London Investment Trust

The City of London Investment Trust (LSE: CTY) is a perfect investment trust for beginners, in my opinion. It’s a diversified portfolio of around 120 stocks that aims to provide long-term growth in income and capital.

The reason this is suited to beginners is that it is managed in a very conservative fashion. It generally invests in well-known blue-chip companies such as Royal Dutch Shell, HSBC Holdings and Unilever and therefore offers a strong degree of stability. The top 10 holdings are shown below:

Source: janushenderson.com. Data as of 31/12/17. 

For the five years to the end of December, the net asset value (NAV) of the trust increased 73%, comfortably beating the return of the FTSE All-Share index, which was 63%.

Furthermore, CTY has an excellent dividend track record, having increased its payout every year for over 50 years now. The current yield is just under 4% and shareholders receive their dividends on a quarterly basis. Management fees are also low at just 0.37%.

I hold CTY in my own portfolio, and I plan to keep holding it for a while to come, enjoying the steady stream of dividends. To my mind, it’s a fantastic core holding.

Temple Bar Investment Trust

Another very similar investment trust, also well suited to beginners, is the Temple Bar Investment Trust (LSE: TMPL).

Launched in 1926, this one aims to provide growth in income and capital, with the portfolio manager specifically targeting undervalued, out-of-favour companies that have strong balance sheets.

TMPL mainly invests in blue-chip companies, and currently has large positions in HSBC Holdings, Royal Dutch Shell, and GlaxoSmithKline. The top 10 holdings are shown below.

Source: templebarinvestments.co.uk. Data as of 31/12/17. 

This trust could also appeal to dividend seekers, as it pays its dividends on a quarterly basis as well. The payout has been increased for 33 consecutive years now, although the yield is a little lower than CTY’s, at 3.1%.

The long-term performance of the trust is solid, with the NAV increasing approximately 70% for the five years to the end of December. Ongoing charges are 0.51%.

Given its successful long-term track record, the Temple Bar Investment Trust looks to be an excellent fund for those investing their first £1,000.

The post Investing your first £1,000? Here are two investment trusts to consider appeared first on The Twelfth Magpie.

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• 236 years of dividend increases! So are these 4 amazing investment trusts good for passive income?

Edward Sheldon owns shares in Royal Dutch Shell, Unilever, GlaxoSmithKline and the City of London Investment Trust. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended HSBC Holdings and Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.