Beal's portfolio is a fraction of a percentage point behind the highest yielder in the IT Smaller Companies sector, but it had to take a small sum from its reserve to maintain its dividend at the level it wanted in 2012.The manager does not believe other smaller companies funds will be able to meet expectations for yield in 2013.
"Our expectations for dividend growth are below the 10 per cent priced in by the market, we think we could see mid single-digit growth instead," he said.
"We had a disappointing year for dividends in 2012, and a lot of that disappointment was rolled into 2013 by management."
"Companies need a lot of growth to grow dividends by 10 per cent this year, and that’s not what we are forecasting for 2013."
Capita Registrars Dividend Monitor for the last quarter of 2012, published this month, warned that dividends in 2013 would not match up to the record levels seen in 2012.
It forecasted an average dividend growth rate of 8 per cent for this year, in line with Beal’s expectations.
Dunedin Smaller Companies, which switched to an income focus in 2006, is currently yielding 2.73 per cent, substantially down on the figure from a year ago.
This puts it second in the sector behind Aberforth Smaller Companies, which yields 2.9 per cent, although this is boosted by the effect of being on a large discount.
Although higher dividends are available in other sectors, Capita Registrars’ research suggests 2013 could be disappointing for investors across the board.
Dunedin Smaller Companies is the third-best performer of the 17 UK smaller companies trusts over five years, having more than doubled investors’ money.
Its returns of 105.12 per cent in total return terms have been beaten only by Mike Prentis’ BlackRock Smaller Companies and Harry Nimmo’s Standard Life UK Smaller Companies Trust.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
Despite his lukewarm expectations for dividends, the manager says that a smaller companies portfolio is vital for any income investor.
"If you invest in large caps for your income stream, by its nature it is necessary to invest in an index that is very concentrated. The income comes from four major sectors: banks, telecoms, oil and gas and tobacco," he explained.
"You have sector-specific risk and a high level of company-specific risk, and you also have dollar risk, which many people don’t realise – 20 per cent of FTSE 100 revenues are earned in dollars."
"Among smaller companies, the top-15 dividend-payers provide just 30 per cent or so of the income, and no sector dominates apart from support services, which is more or less a catch-all for things that don’t fit elsewhere."
"However, if you own a mainstream income and growth trust you own the top-15 dividend payers, and if you try to diversify by buying another one then you own the same stocks again."
The trust’s chairman, Lord Dalhousie, says that he hopes not to have to dip into reserves to maintain the dividend again.
"We have got quite good reserves – 1.2 years’ worth – and we only paid £150,000 out of reserves of £2.6m," he said.
"We thought we should use our reserves to grow our yield in these difficult times. In the long-term if dividends do not start growing significantly then we will not be able to keep it up, or want to."
The chairman explained that the trust, which currently has a market capitalisation of £94m, is aiming to grow to £150-160m, but is finding it difficult to attract inflows.
The trust is one of only two smaller companies ones – the other being Harry Nimmo’s Standard Life portfolio – to have a share price close to net asset value, which may deter new investors.
According to figures from the AIC, the trust is on a discount of 2.4 per cent, and the Standard Life portfolio is at 1.1 per cent.
BlackRock Smaller Companies has the third-lowest discount in the sector at 13.5 per cent, while the overall sector average is 14.4 per cent.
Lord Dalhousie prefers to wait until the discounts on the sector tighten rather than trying to compete with other trusts for price.
This makes Dunedin Smaller Companies less attractive to investors who search for trusts on a discount that they think will narrow, boosting their returns.
However, some well-regarded analysts think investors are wrong to overlook trusts that are trading on premiums, and should focus on the quality of the underlying portfolio.
Another issue for the trust is the existence of Aberdeen Smaller Companies High Income, which is yielding 3.5 per cent.
The trust has the same equity portfolio but uses gearing to boost returns, and adds a selection of fixed-interest investments into the mix.
It is trading on a discount of 5 per cent, despite a strong track record in recent years.
On a total return basis the trust has made 115.34 per cent over three years, according to data from FE Analytics, more than the Dunedin portfolio.
Performance of trusts over 3yrs
Source: FE Analytics