I’d buy these investment trusts when interest rates fall

29/06/2024

Cash ISA rates are good right now, up around 5%. That’s in line with some of my favourite investment trusts. But what happens when interest rates fall?

These are tough times, and I can see the sense in a Cash ISA now. If you just want to preserve capital with no risk, they seem ideal.

But the Bank of England (BoE) will cut rates, sooner or later. And May inflation was down to just 2%. So maybe soon.

A cash shift

By the time we’ve had a couple of cuts, I can see a lot of cash moving back into stocks. And to reduce risk, I reckon investment trusts could be a great move.

I go for trusts that offer wide diversification, and aim to grow their long-term dividend income.

City of London Investment Trust (LSE: CTY) has been my favourite for some time. We’re looking at a 4.9% dividend yield, which is in line with those Cash ISAs.

The share price has picked up a bit in 2024, so some of that cash shift might have already started.

Dividend Hero

The Association of Investment Companies has a list of what it calls its Dividend Heroes. That’s the ones who have raised their dividends for at least 20 straight years. City of London is one.

It does, I think, mean that if it fails to lift the cash one year, investors could dump the shares and we could see a price slump. But it’s managed it for 57 years, so far.

The trust holds a number of FTSE 100 shares, with BAE Systems, Shell and HSBC Holdings its top three.

UK diversification

Murray Income Trust (LSE: MUT) has also seen its shares pick up in 2024.

This trust has the same kind of aim, also going for a range of UK stocks. This time, AstraZeneca, Unilever and RELX are the top three.

And, right now, the dividend yield is a bit lower than City of London’s, at 4.4%.

Double up?

With the two so similar, why might I want to buy both? Well, it would give me even more diversification. And it would split the management of my cash two ways, and reduce my risk too.

Murray Income’s run by abrdn, while City of London is under the management of Janus Henderson Investors.

This time we have a record of 50 years of dividend rises in a row. Again, a fail one year to keep it up could hit the share price.

Better than a Cash ISA?

The returns from these two trusts are similar to a Cash ISA. But they’re not guaranteed the way its rates are, so they’re not as safe.

A Cash ISA does have the lower risk here, for sure. But when BoE rates (and ISA rates with them) come down, the higher risk of stocks might be worth it.

For those looking for lower-risk stock market investments, I’d say investment trusts like these are well worth considering.

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