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When looking to increase passive income, investors often turn to old trusted friends like Lloyds. However, investment trusts can also be a great source of dividends, particularly due to the risk of a dividend cut being offset by dozens of other companies.
Here are two from the FTSE 250 index that might be of interest.
Blue-chip holdings
Merchants Trust (LSE:MRCH) aims to deliver a “high and rising income together with capital growth“.
Founded in 1889 and managed by Allianz Global Investors, it invests mainly in high-yield FTSE 100 dividend stocks. So we’re talking Lloyds, Shell, BP, and so on.
However, the £823m trust is quick to point out that many of these are multinationals. GSK, for example, sources more than half of revenue from the US, while British American Tobacco‘s tentacles stretch from Latin America to Asia and just about everywhere in between.
Impressively, Merchants has grown its payout for 43 consecutive years at an annualised growth rate above inflation. At 553p, the dividend yield is 5.3%, which is above the FTSE 100 average of about 3.4%.
One developing risk here is that two of the top five holdings are UK banks (Lloyds and Barclays). Earlier this week, an influential think tank said the cash-strapped government should consider taxing the interest banks receive from reserves held at the Bank of England.
If this idea became policy, bank stocks would probably fall lower and their dividend growth could be jeopardised. This could have a knock-on effect on the trust.
This is just speculation, though, and Merchants has lived through far worse, including two World Wars and the Wall Street crash. I expect it will survive a potential bank tax raid by the government.
Finally, the trust is trading at an attractive 10% discount to its net asset value (NAV).
Looking eastwards
The second FTSE 250 trust I think is worth digging into is Schroder Oriental Income Fund (LSE:SOI).
The trust does what it says on the tin, providing shareholders with a way “to tap into the Asian income story and help investors diversify their dividends“.
The [Asian] region is forecast to enjoy higher economic growth than many other parts of the world over the medium to longer term. Favourable demographics and a growing middle class in Asia are expected to continue to fuel strong domestic consumption — increasing the prospects for both capital and income growth.
Schroder Oriental Income Fund
Turning to the portfolio, there are 60-80 stocks spread over multiple countries and in a range of industry sectors. Names include Samsung Electronics, Singapore Telecommunications, and Telstra Group (Australia).
In July though, the trust’s top holding was Taiwan Semiconductor Manufacturing Co (TSMC), the world’s leading chip foundry. Now, this may not scream juicy dividends because the stock is up 200% in five years, with the current dividend yield only 1.3%.
However, this is because TSMC is prioritising investments to capitalise upon AI opportunities rather than income. With a 12.6% portfolio weighting, though, there’s a risk this large holding could affect performance if AI growth slows.
Nevertheless, I expect TSMC to increase payouts substantially in future due to its incredible margins and dominant market position.
The trust is currently yielding just under 4%. Add in potential share price growth in future, and I like the long-term prospects here.
This story originally appeared on Motley Fool
