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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.

Alex Paget

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


Company Sector Number of consecutive years dividend increased
City of London Investment Trust UK Growth & Income 46
Alliance Trust Global Growth 46
Bankers Investment Trust Global Growth 46
Caledonia Investments Global Growth 45
Foreign & Colonial Investment Trust Global Growth 42
F&C Global Smaller Companies Global Growth 42
Brunner Investment Trust Global Growth 41
JPMorgan Claverhouse Investment Trust UK Growth 40
Witan Investment Trust Global Growth 38
Scottish American Global Growth & Income 33
Scottish Mortgage Investment Trust Global Growth 30
Merchants Trust UK Growth & Income 30
Murray Income UK Growth & Income 29
Scottish Investment Trust Global Growth 29
Temple Bar UK Growth & Income 29

Source: The AIC

Caledonia Investments 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.

ALT_TAG Other popular vehicles on the list include James Anderson’s (pictured) Scottish Mortgage Investment Trust and Alastair Mundy’s Temple Bar trust.

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

ALT_TAG

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.

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jason Apr 02nd, 2013 at 10:35 AM

The growth of the trust price is more important than the rise in dividend.

Reply
dlp6666 Mar 13th, 2013 at 10:50 AM

Lenghty records of year-on-year dividend increases are impressive, but surely at least as, if not more, important is the AMOUNT of those increases.

Annual increases of, say, a paltry 1% or 2% won't do much to protect against inflation (and these usually start from pretty low initial yields anyway).

Is there some sort of 'league table' of annualised GROWTH in (as distinct from LENGTH of) IT dividends over long periods, please?

Reply
Theo Mar 13th, 2013 at 12:05 AM

Brodie-Smith is paid to blow the AIC trumpet, but I do not understand her argument that ITs have an advantage in being able to withhold part of their earnings and pay it it out later.

Unless one is living from hand to mouth, why is it better to receive 4% this year and 5% next year, rather than 4.5% for two years?

Reply
boo Mar 13th, 2013 at 11:18 AM

just a humble amateur investor but as I understand it - although there are usually dividends to be shared out there is NO GUARANTEE you will get a dividend UNLESS the manager can keep something in reserve from the "good years" for the "bad year" - ONLY a closed end fund has this facility!

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