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Investment trusts can be an easy way for an investor to tap into professional money managers. The ability to buy any amount of stock in the trust means that it’s a cheap way to allocate some money to different strategies managed by experts. As part of a hunt for income stocks, here’s one trust I spotted with a generous dividend.
A yield double the FTSE 100 average
I’m talking about Invesco Bond Income Plus (LSE:BIPS). As the name suggests, it invests predominantly in high-yield bonds, plus some fixed interest securities more broadly. It may also hold bonds that are similar to stocks, known as convertible securities, which can flip into stock if certain conditions are met over the lifetime of the bond.
Due to the types of bonds being traded, the coupon payments are often higher than those of normal bonds. This is because they carry a higher level of risk. The income from these coupons is a major source of the fund’s revenue, which is then used to pay out to shareholders as a dividend. That’s why the dividend yield of 6.7% is basically double the FTSE 100 average.
This higher level of risk might put some people off. However, this is where the expertise of the managers comes in. For sure, I wouldn’t feel comfortable constructing this portfolio by myself. However, the team conducts credit analysis to select bonds that offer a sufficient yield for their risk. They avoid (or limit exposure to) issuers with weak fundamentals unless the risk relative to the return looks attractive. Invesco, as a brand, has a long (and strong) track record in this asset class.
A sustainable dividend
Unlike bond coupons, dividends aren’t guaranteed. However, I believe the dividend is sustainable as most of the revenue comes from the bonds. If an issuer stops paying the coupons, it effectively defaults on the bond, with serious ramifications. Therefore, this should only happen in rare circumstances.
Further, like stock investors try to do, the trust is diversified. This means the fund is not overly dependent on any single bond, sector, or geography. That reduces the volatility of income and the risk of big unexpected losses. For example, the current largest holding is in Lloyds Banking Group via corporate bonds. However, this position only makes up 1.93% of the overall portfolio. It’s not exposed in a large way to any single company.
Another element of the dividend yield is the share price. Over the past year, the stock is up 1%. The stock should closely track the net asset value of the portfolio. One risk is the fact that bond prices can fluctuate. So the share price can be volatile if we see large moves in the underlying assets in the portfolio. However, even with normal stocks bought for income, volatility in the share price can’t be avoided.
On balance, I believe the trust is a good way to get exposure to the bond market and to provide a good source of income. As a result, I think it’s a stock for investors to consider.
