For anyone building wealth over the long term, that’s a powerful advantage. Add to that the ability to choose exactly what goes inside the wrapper – from individual shares to bonds, funds and trusts – and the flexibility becomes clear.

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.

The steady income route

Personally, I think investment trusts can be an underrated way to fill that allowance. They offer a ready-made, professionally-managed portfolio of assets, which means an investor can gain exposure to dozens of companies in one trade. For those leaning towards income generation, dividend-focused investment trusts can provide a reliable stream of cash, often paid quarterly.

With that in mind, I’ve identified two trusts worth considering for an income-focused ISA. While neither excels in capital gains, their strong dividend records and reasonable valuations could form the foundation of a dependable passive income strategy.

Of course, there are trade-offs. While the steady income’s appealing, the underlying capital growth tends to be slower than in pure growth funds. And ongoing management fees, even when modest, will nibble away at returns over time. 

Aberdeen Equity Income Trust

Aberdeen Equity Income Trust‘s (LSE: AEI) a closed-end investment company that holds between 50 and 70 UK shares. These include big names like Imperial Brands, HSBC, BP and Berkeley Group.

Its portfolio’s nicely spread across sectors, with 42% in financials, 16% in industrials, 14% in energy and 9% in consumer staples. That sector diversity helps balance risk, though its UK-only focus could limit returns if the domestic economy stumbles.

The trust has a market-cap of £178.9m, which means it can be more volatile than larger funds. The share price has only risen around 37% over the past five years, but income investors may forgive that given the 14 consecutive years of dividend growth. 

The yield sits at an impressive 6.2%, with a payout ratio of just 54.39%, suggesting the payments are well covered. Valuation looks appealing, with a price-to-earnings (P/E) ratio of 8.8 and the shares trading at a slight 1.8% discount to net asset value.

Schroder Income Growth Fund

Schroder Income Growth Fund (LSE: SCF) takes a similarly UK-centric approach, investing in household names such as AstraZeneca, HSBC, Shell, Lloyds and National Grid. Around 30% of its holdings are in defensive sectors, 45% in cyclical industries, and 23% in economically sensitive areas.

With 98% of its assets in the UK, it also faces geographical concentration risk, leaving it exposed to domestic downturns. Still, the income track record’s hard to ignore — more than two decades of continuous dividend growth. The current yield’s 5.16%, supported by a very conservative payout ratio of 27.42%. 

With a P/E ratio of just 6, it appears undervalued and attractive, while the £221.37m market-cap provides a little more stability than some smaller trusts. The share price has grown about 30% in five years, making it more of a steady plodder than a high-flyer.

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Growth

Thematic trusts with a tech flavour have considerable growth potential as the digital revolution rolls on. The Allianz Technology Trust (LSE:ATT) is one that’s already proved its mettle — the average annual return over the past five years is 14.9%.

This financial vehicle holds 46 companies, ranging from semiconductor and smartphone manufacturers to social media operators and software developers. This provides exposure to multiple megatrends for the next decade and beyond, from the artificial intelligence (AI) and cloud computing booms to increasing consumer electronics demand.

As we spend more time online and automation spreads, I think the trust could grow rapidly in size. Remember, though, that its holdings are highly sensitive to economic conditions. This means returns could disappoint during economic downturns.

Dividends

There’s much more to successful passive income investing than just choosing shares with the largest yields. With Schroder Income Growth Fund (LSE:SCF), investors have enjoyed consistent dividend growth AND yields that top the market average.

Since it was created back in the mid-1990s, dividends here have grown every year. And according to the Association of Investment Companies (AIC), dividend growth has averaged 2.8% during the last five years.

Today, its forward dividend yield is 5.3%, far above the FTSE 100‘s 3.5% average.

As the graphic shows, this trust has significant exposure to UK blue-chip shares across multiple sectors. This provides good diversification to reduce risk, and helps provide a smooth return across the economic cycle.

As a UK investment trust focused on domestic equities, it carries greater regional risk than more global trusts. However, this hasn’t prevented it delivering strong returns more recently (its annual average return since mid-2020 is a healthy 10%).

Value

The Fidelity Special Values (LSE:FSV) trust is designed to achieve capital growth “primarily through investment in equities (and their related securities) of UK companies which the investment manager believes to be undervalued or where the potential has not been recognised by the market“.

The results have been spectacular. During the last five years, it’s delivered an average annual return of 18.4%. That’s despite, as with the Schroder dividend trust I’ve described, its narrow geographical makeup bringing higher risk.

While this remains an ongoing danger, I think this focus on UK shares could also continue working in its favour, though. Recent demand for British shares has jumped due to their cheapness, and especially compared with US shares. Yet, many quality London-listed companies still look undervalued, providing scope for further gains.

Take Standard Chartered, this Fidelity trust’s single largest holding. Price-to-earnings-to-growth (PEG) and price-to-book (P/B) ratios of below one suggest the FTSE 100 bank still offers tremendous value.

The trust’s high weighting of cyclical shares (like financials, industrials, and discretionary consumer goods businesses) may leave it vulnerable during economic downturns. But on a long-term basis, I’m confident it can deliver outstanding shareholder returns.

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Schroder Income Growth Fund

As the name implies, the Schroder Income Growth Fund (LSE:SCF) is designed to provide investors with a rising dividend over time. This can be critical for long-term wealth building by protecting investors from inflationary impacts.

Dividends here have risen every year since the fund listed back in 1995.

In total, the Schroder Income Growth Fund has positions in almost 50 predominantly large-cap shares. This focus on market-leading companies with strong balance sheets (like Unilever, HSBC, and Legal & General) gives it excellent dividend visibility.

Today the fund carries a market-beating 5.3% forward dividend yield. And at 294p, its share price sits at a 9.8% discount to its net asset value (NAV) per share.

It may have fewer holdings than many other trusts, which in turn means higher risk. But I still think it’s worth considering at today’s prices.

BlackRock Latin American Investment Trust

The BlackRock Latin American Investment Trust (LSE:BRLA) is designed to capitalise on the region’s rising wealth and growing populations. More specifically, it’s focused on South America’s economic engine rooms of Brazil, Mexico, and Chile.

The fund invests across multiple sectors, helping it to spread risk and profit from a multitude of growth opportunities. Major holdings here include iron ore producer Vale, energy giant Petrobras, and retailer Walmart de México y Centroamérica.

Bear in mind, though, that more than 70% of the trust is invested in cyclical sectors like raw materials and consumer goods. This could leave it particularly vulnerable to periods of economic weakness.

At 307p per share, BlackRock’s Latin American trust trades at a decent 12.2% discount to NAV per share. Meanwhile, its forward dividend yield is a huge 6.2%.

I like it, even though an ongoing charge of 1.13% is higher than that of many other investment trusts.

Baillie Gifford US Growth Trust

The Baillie Gifford US Growth Trust (LSE:USA) is another regional fund I think’s worth a close look from ISA investors. Its high weighting of market-leading global innovators provides plenty to get excited about, in my view.

Major US-listed shares here include Amazon, Meta, Nvidia, and Shopify, though it also holds stakes in private companies. Indeed, Elon Musk’s SpaceX venture represents its largest single holding (11.1% of the total fund).

Once again, this investment trust is well diversified, with holdings spread across nine sectors including information technology, consumer goods, industrials, and telecoms. With a large weighting of technology shares, too, it provides exposure to high-growth areas like cloud computing, artificial intelligence (AI), and e-commerce as well.

Today this Baillie Gifford trust looks dirt cheap. At 227p per share, it trades at a 10.3% discount to its NAV per share. That’s attractive value in my book, even though a US recession could dent near-term performance.

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An excellent investment trust

The Lowland Investment Company (LSE: LWI), should fit the bill as a share poised to benefit from the appetite for value-focused investments as inflation persists. Top holdings include big UK shares such as Shell, GlaxoSmithKline, Phoenix Group, HSBC and BP.

Shell’s share price has risen by 18% this year, and commodities could continue to do well in an inflationary environment. The flipside of this is that the trust is very UK-focused so if investors continue to avoid the UK, as many institutional big-hitters do, then that may impact the trust’s performance. Its big exposure to financials such as banks and to oil & gas could be an issue too, as both of these industries are cyclical.

Coupled with net gearing of 15%, which could amplify losses if the trust invests in the wrong companies, this one isn’t without risks.

However, the shares trade on a discount of around 6% (although the discount has been larger in recent times). As well as that, shares in the trust yield 4.46%, which I think has appeal from an income perspective. Charges of 0.59% also compare favourably to other trusts, so I’m thinking of buying shares in it to get diversified exposure to UK value shares. 

Better than SMT?

The Schroder Income Growth Fund (LSE: SCF) is another higher-yielding UK-focused pick. The yield is about 4.1%, so that’s good versus most other stock market investments and compared to interest rates as they currently stand. The trust’s top holdings are AstraZeneca, GlaxoSmithKline, Anglo American and Shell.

The immediately obvious downside to this one is that it trades on a premium of about 1% to its net asset value. On top of that, it’s slightly more expensive with a charge of 0.79%. Its consistent record of dividend growth potentially makes that a price worth paying, especially if its underlying holdings do well and push up the net asset value of the trust.

The bottom line is these trusts are quite similar in many ways so I wouldn’t buy both – even though the two of them could well outperform Scottish Mortgage Investment Trust this year and maybe also over the longer term also. It’s a close call between them but Lowland looks to have the slight edge for me based on its lower charges and the fact it trades on a discount.

To recap I think inflation will drive the share prices of these value-focused investments. That’s why I’m keen to add a value investment trust to my portfolio. 

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Investment trusts usually own portfolios of stocks managed by professional investment managers. Not only does this approach provide diversification, but it’s also a good approach for income investors. 

Trusts have to distribute most of their income to investors with dividends every year. However, they can hold back 25%. Managers can then use this reserve to cover distributions if the income from their investment portfolio falls.

This was particularly useful last year. As companies across the market slashed their payouts, investment trusts dug into reserves to maintain dividends. 

Considering these qualities, there are two income trusts I’d buy for my portfolio today. 

Investment trusts for income

The first company on my list is the Schroder Income Growth Fund (LSE: SCF). With a dividend yield of 4.1%, at the time of writing, the trust offers a market-beating level of income. 

It seeks to invest in companies that can provide a steady stream of income as well as capital growth. The largest holding in its portfolio is pharmaceutical group AstraZeneca. As well as a selection of blue-chips, managers have also acquired several mid-cap stocks including Pets At Home. There are also income and growth stocks such as Burberry.

This approach could be risky because it involves trying to pick growth stocks. Growth stocks are likely to be more volatile than income investments. Therefore, Schroders’ offering may not be suitable for all investors. 

Still, I like the combination of income and the potential for capital growth offered by the trust. That’s why I’d buy the shares for my portfolio today as an income and growth investment. 

International investing

As well as the Schroder, I’d also buy Troy Income & Growth (LSE: TIGT). Some investors might think that just because both of these investment trusts have the words income and growth in the title, they follow the same strategy. That’s not the case. There’s some overlap in the portfolios, but not much. 

The biggest difference is the fact that nearly a fifth of Troy’s portfolio is allocated to US securities. This gives the trust a level of diversification. It also has less exposure to resource stocks, which some investors may be more comfortable with. The Schroder fund’s second-largest holding is Rio Tinto. Troy’s is Unilever. 

That said, some investors may not be comfortable with a trust investing overseas. It also targets growth companies over income investments, so dividend yield is lower than the trust above. Troy’s offering currently supports a dividend yield of 3.6%. 

Despite these risks, I’d buy Troy alongside Schroder in my portfolio for a blend of international and domestic growth as well as income from these two investment trusts.

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