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Dividends can never be guaranteed, and especially during economic downturns. UK shares are typically known as good shares to buy for investors targeting a second income. But British companies aren’t immune to the profits problems that can impact shareholder payouts.
Purchasing dividend-focused investment trusts can be a great way to reduce (if not completely eliminate) these threats. These financial vehicles often hold stakes in a variety of companies. So problems felt by a handful of companies doesn’t necessarily mean that investors’ dividend income collapses.
With this in mind, here are three top trusts I think could be great sources of long-term passive income. If broker forecasts are correct, a £15,000 lump sum spread equally among them will yield a £1,410 second income this year alone.
Henderson Far East Income (dividend yield: 11.2%)
Economic bumpiness in China has been a problem for Henderson Far East Income (LSE:HFEL) recently. Trouble in its core market (and contagion to nearby economies) has caused its share price to drop. This has, in turn, supercharged its dividend yield.
While risks remain, I think this emerging market trust could deliver great long-term returns. I certainly expect it to continue raising dividends for the foreseeable future (annual rewards have risen every year since 2008).
This Henderson trust holds stakes in around 70 companies. These range across sectors and include Alibaba, Taiwan Semiconductor Manufacturing Co and China CITIC Bank.
I think it’s worth considering as way to capitalise on soaring Asian wealth and population levels.
Chelverton UK Dividend Trust (dividend yield: 9%)
As its name implies, the Chelverton UK Dividend Trust (LSE:SDV) is focused on generating returns from London-listed shares. This leaves it more vulnerable to nation-specific risks than continental or investment trusts.
But with more than 60 holdings, and a focus on mid-to-small-cap companies, it still offers a diversified approach that can provide long-term payout growth. Dividends here have risen consistently for the past 14 years.
Like Henderson Far East Income, Chelverton’s capital is spread across a wide spectrum of sectors. Industrial goods and services, financial services, and construction are especially well represented through shares like Smiths News, Duke Royalty, and Severfield.
Small-cap shares like this can be more volatile than blue-chip stocks, which is a risk to consider. However, they can also have superior growth potential over time.
Social Housing REIT (dividend yield: 7.9%)
As a real estate investment trust (REIT), this particular vehicle’s set up in a way that prioritises dividends income. Sector rules mean that 90% of rental earnings must be paid out each year.
This doesn’t always guarantee a reliable passive income. But Social Housing REIT (LSE:SOHO) focuses on the stable supported housing sector, which provides a cushion of safety.
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Unlike those other two trusts, this one doesn’t invest in equities. Instead, it holds a portfolio of almost 500 residential properties comprising around 3,500 homes. This helps protect group earnings from problems (such as rent collection or cost issues) at one or two locations.
Despite interest rate risks, I think this property trust is worth serious consideration for dividends.
