I’d buy this top investment trust to earn 5% passive income for life


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FTSE 100 shares are a brilliant way of generating passive income for retirement but I am also keen on investment trusts.

An investment trust is a company traded on the London Stock Exchange, whose business is investing in shares and other assets to generate profit for shareholders.

I’d buy this trust for passive income

There are hundreds of investment trusts covering almost every market in the world, and some have astonishing track records stretching back to Victorian times. They can be bought inside the annual £20,000 Stocks and Shares ISA allowance for tax-free returns. 

City of London Investment Trust (LSE: CTY) is the most popular investment trust of all. Private investors checked it out more than any other trust last year, according to industry body the Association of Investment Companies (AIC).

While popularity isn’t always a good sign of a top investment, I think it is in this case. City of London is an equity income fund with an amazing long-term track record of generating strong returns from a portfolio of FTSE 100 blue-chip stocks.

The £2bn fund’s top 10 holdings include a bunch of familiar faces to Fool regulars, including British American Tobacco, Shell, Diageo, BAE Systems, BP, and AstraZeneca.

Currently, it yields 4.87% a year, which is impressive, given that the average yield across the index is 4.1%. It has a low annual charge of just 0.33%, which means investors get to keep more of the income to themselves.

Now here’s the famous thing about City of London. It has increased dividend payouts for each of the last 56 years, longer than any other investment trust. It’s a real dividend aristocrat.

The investment trust structure allows management to hold back dividends and profits in the good times, to deploy them in the bad. That gives investors a smooth stream of dividends, that rises steadily over time.

Over the last turbulent year, City of London delivered a total return of 9.3%. I think that’s impressive, given what happened elsewhere. Over five years, City of London’s total return is 19.3%. This compounds to a hugely attractive 98.1% over a decade. 

I run my own FTSE 100 stock portfolio

The downside is that the trust’s popularity has left it trading at a premium of 4.5% to the net value of its underlying assets. Basically, investors are paying a premium for success and there’s a greater risk that the price could fall on adverse news. And maybe this is not the best time to buy the trust, given that the FTSE 100’s rebound has driven up its value by 14.3% in just three months. 

I would still buy City of London like a shot, but for one thing. Personally, I prefer to run my own portfolio of FTSE 100 dividend-paying shares.

That allows me to build a concentrated portfolio of just 15 stocks, focusing on those that potentially offer me higher income and capital growth too. I also think it’s fun picking my own stocks, rather than letting a fund manager do it for me. If I didn’t feel that way, I’d buy City of London instead, and let my passive income roll up over the decades.

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