The best investment trusts for dividend growth
Closed-ended funds' ability to dip into revenue reserves means they find it easier to grow their dividend year-on-year.
By Alex Paget, Reporter, FE Trustnet
Tuesday March 12, 2013
Eight investment trusts have managed to increase their dividend in each of the last 40 discrete years or more, according to research from the AIC.
The Alliance Trust
, the City of London Investment Trust
and the Bankers Investment Trust
have managed 46 consecutive years of dividend growth – an eye-catching feat given the numerous financial crises stock markets have encountered over the period.
Trusts with the highest number of consecutive dividend increases
Source: The AIC
is just behind them on 45 years, while the Foreign & Colonial Investment Trust
, the F&C Global Smaller Companies
, the Brunner Investment Trust
and the JPMorgan Claverhouse Investment Trust
have also managed 40 years or more.
Other popular vehicles on the list include James Anderson’s (pictured) Scottish Mortgage Investment Trust
and Alastair Mundy’s Temple Bar
Although markets have rallied recently, the hunt for income is still a priority for many investors, given that interest rates are expected to stay at historical lows for some time to come.
With government bond yields now close to rock-bottom, dividend-paying equity investments – including trusts – are in particularly high demand.
This has resulted in many income trusts moving on to premiums, although it is still possible to find some bargains from the list above.
The Caledonia Investments trust, for example, has grown its dividend for 45 years in a row, is currently yielding 2.41 per cent and last year paid out a dividend of 42.9 pence per share.
However, it is on a discount of 20 per cent, which was as high as 24 per cent in November last year.
The Alliance Trust and Bankers Trust are also possible bargain plays, currently on discounts of 14.3 and 3.4 per cent, respectively.
Annabel Brodie-Smith, communications director at the AIC, says that the ability to hold back 15 per cent of their yield each year gives investment trusts a big advantage over their open-ended rivals.
"With interest rates at record lows, investors need to put their money to work in order to achieve any kind of yield," she said.
"It is encouraging to see that investment company investors are being rewarded for taking on the additional risk that comes with equity investment, with so many of Britain’s oldest, largest and well-known investment companies announcing dividend increases year after year."
"Investment companies have a structural advantage over other types of collective investment because they are able to squirrel away some of the income they receive each year into their revenue reserves to help boost dividends in more difficult years."
"This is known as ‘dividend smoothing’ and means that many investment companies are able to continue to pay and boost dividends through both the good times and the bad."
According to research from Fundexpert’s Brian Dennehy, the longest amount of time an open-ended equity income fund has increased its dividend is nine years. The vehicles that have achieved that are Artemis Income, Blackrock UK Income and Invesco Perpetual High Income
The Alliance Trust was the most recent closed-ended fund to announce an increased yield. The trust was launched back in 1888 and has a yield of 2.19 per cent – which is paid out quarterly.
While some of the trusts on the list also have impressive total return numbers, others have struggled, including the Alliance Trust. This goes some way in explaining why it is on such a big discount.
According to FE Analytics
, it has underperformed its benchmark – split 50/50 between the FTSE All World and FTSE All Share – over a 10-year period, with more volatility.
Performance of fund vs index over 10yrs
Source: FE Analytics
It does have a better record in the shorter-term, though.
The Caledonia Investments trust has had a very poor five years, with returns of just 4.22 per cent compared with 40.95 per cent from its All Share benchmark.
However, it has seen a change in management recently and short-term performance has markedly improved.
Other trusts have been able to deliver consistent total returns as well as consistent dividend growth, namely the F&C Global Smaller Companies
fund, which tops its IT Global Growth sector over three, five and 10 years.
Over the last decade, it has delivered in excess of 600 per cent. The next best performer – Lindsell Train IT – has returned 412.87 per cent.