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One of the best tools in a British investor’s arsenal has to be the Stocks and Shares ISA. It offers an annual allowance of £20,000 that can be invested in a wide range of assets without paying tax on capital gains or dividends.
For anyone building wealth over the long term, that’s a powerful advantage. Add to that the ability to choose exactly what goes inside the wrapper – from individual shares to bonds, funds and trusts – and the flexibility becomes clear.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
The steady income route
Personally, I think investment trusts can be an underrated way to fill that allowance. They offer a ready-made, professionally-managed portfolio of assets, which means an investor can gain exposure to dozens of companies in one trade. For those leaning towards income generation, dividend-focused investment trusts can provide a reliable stream of cash, often paid quarterly.
With that in mind, I’ve identified two trusts worth considering for an income-focused ISA. While neither excels in capital gains, their strong dividend records and reasonable valuations could form the foundation of a dependable passive income strategy.
Of course, there are trade-offs. While the steady income’s appealing, the underlying capital growth tends to be slower than in pure growth funds. And ongoing management fees, even when modest, will nibble away at returns over time.
Aberdeen Equity Income Trust
Aberdeen Equity Income Trust‘s (LSE: AEI) a closed-end investment company that holds between 50 and 70 UK shares. These include big names like Imperial Brands, HSBC, BP and Berkeley Group.
Its portfolio’s nicely spread across sectors, with 42% in financials, 16% in industrials, 14% in energy and 9% in consumer staples. That sector diversity helps balance risk, though its UK-only focus could limit returns if the domestic economy stumbles.
The trust has a market-cap of £178.9m, which means it can be more volatile than larger funds. The share price has only risen around 37% over the past five years, but income investors may forgive that given the 14 consecutive years of dividend growth.
The yield sits at an impressive 6.2%, with a payout ratio of just 54.39%, suggesting the payments are well covered. Valuation looks appealing, with a price-to-earnings (P/E) ratio of 8.8 and the shares trading at a slight 1.8% discount to net asset value.
Schroder Income Growth Fund
Schroder Income Growth Fund (LSE: SCF) takes a similarly UK-centric approach, investing in household names such as AstraZeneca, HSBC, Shell, Lloyds and National Grid. Around 30% of its holdings are in defensive sectors, 45% in cyclical industries, and 23% in economically sensitive areas.
With 98% of its assets in the UK, it also faces geographical concentration risk, leaving it exposed to domestic downturns. Still, the income track record’s hard to ignore — more than two decades of continuous dividend growth. The current yield’s 5.16%, supported by a very conservative payout ratio of 27.42%.
With a P/E ratio of just 6, it appears undervalued and attractive, while the £221.37m market-cap provides a little more stability than some smaller trusts. The share price has grown about 30% in five years, making it more of a steady plodder than a high-flyer.
