I’d buy this top investment trust to earn 5% passive income for life

FTSE 100 Shares are a great way to generate passive income for retirement but I also like investment trusts.

Investment trust is a company that trades in London Stock Exchangewhose business is investing in stocks and other assets to generate profits for shareholders.

I bought this trust for passive income

There are hundreds of investment trusts covering almost every market in the world, and some have impressive track records dating back to Victorian times. They can be bought into a Stocks and Shares ISA allowance of £20,000 a year for tax-free returns.

City of London Investment Trust (LSE: CTY) is the most popular investment trust. Private investors checked out more than any other trust last year, according to industry body the Association of Investment Companies (AIC).

While popularity isn’t always a sign of top investment, I think so in this case. City of London is an equity income fund with an outstanding long-term track record of generating strong returns from a portfolio of FTSE 100 blue-chip shares.

The 10 biggest holdings in the £2bn fund include many familiar faces to regular Fools, including British American Tobacco, shell, Diageo, BAE system, BPand AstraZeneca.

Currently, it yields 4.87% annually, which is impressive, given that the average yield on the index is 4.1%. It has a low annual fee of only 0.33%, which means that investors get more income for themselves.

Now this is what is famous about the City of London. It has increased its dividend payout for each of the last 56 years, longer than any other investment trust. It is a real dividend aristocrat.

The investment trust structure allows management to retain dividends and profits in good times, to distribute them in bad times. That gives investors a smooth stream of dividends, which are constantly increasing.

During the last turbulent year, the City of London returned a total of 9.3%. I think that’s impressive, given what happened elsewhere. Over five years, the City of London’s total return was 19.3%. This compound became very attractive 98.1% over a decade.

I run my own portfolio of FTSE 100 stocks

The downside is that the trust’s popularity makes it trade at a premium of 4.5% of the net value of its underlying assets. Basically, investors pay a premium for success and there is a greater risk that prices may fall due to bad news. And it might not be the best time to buy into that belief, as the rebounding FTSE 100 has seen its value rise by 14.3% in three months.

I would still buy City of London as a shot, but one thing. Personally, I prefer to run a portfolio of dividend-paying FTSE 100 stocks.

That allows me to build a concentrated portfolio of only 15 stocks, focusing on those that have the potential to give me higher income and capital growth as well. I also like to pick my own stocks, rather than letting the fund manager do it for me. If I didn’t feel that way, I’d buy the City of London, and let my passive income grow for decades.