One of the most attractive features of investment trusts is their ability to smooth dividends over more difficult years, offering a payout even when markets have had a tough time.
There are a number of investment trusts with a strong record of growing their dividends over the long-term, something that is key when you factor in the eroding effect of inflation.
Funds need to grow their dividends at higher than the rate of inflation to deliver any extra returns to the underlying shareholders.
With this in mind, FE Trustnet looks at the top three trusts for dividend growth in the IT UK Equity Income sector.
Perpetual Income & Growth IT
Numis’ Charles Cade (pictured) says the four FE Crown rated Perpetual Income & Growth IT is his preferred choice for investors looking for a strong and growing dividend.
“It’s a very attractive fund. Mark Barnett runs it and will continue to run it even though he’s taken on the Edinburgh Investment Trust,” Cade said. Over the last five years, the trust has the best record in the sector for growing its dividend well ahead of inflation, at 6.8 per cent, according to the AIC.
While the trust is not the highest yielding portfolio in the sector, it has a dividend yield of 3.07 per cent, putting it right in the middle of the pack.
The trust has a strong track record on a total return basis as well, though it does tend to outperform in falling markets – such as 2008 and 2011. The trust has still outperformed both the FTSE All Share and IT UK Equity Income sector in rising markets, though not as strongly as some of its peers.
Over the last decade, Perpetual Income & Growth made 229.6 per cent while the sector and index gained 147.17 per cent and 126.22 per cent, respectively.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
Cade highlights the fact that the trust has a mid-cap bias, though stalwart income-paying stocks like Astrazeneca, British American Tobacco and GlaxoSmithKline all feature in the top-10 holdings.
The trust is trading on a discount of 2.1 per cent and has ongoing charges of 1.93 per cent, including a performance fee. It has ongoing charges of 0.99 per cent via the Trustnet Direct platform.
Lowland Investment Company IT
FE Alpha Manager James Henderson’s five FE Crown rated Lowland Investment Company comes second on the list in terms of growing its dividend over the last five years, at 6.3 per cent.
Cade also thinks the trust is attractive when looking at its dividend growth, but says its underlying yield is a bit low for an equity product. It is currently yielding 2.5 per cent.
Lowland has been exceptionally consistent on a total return basis, beating both the sector and index significantly over the last one, three, five and 10 years.
Over the last decade, the trust has made 245.84 per cent, nearly doubling the returns of the FTSE All Share. The sector made 147.17 per cent over the period.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
Unlike the Perpetual Income & Growth trust, Lowland tends to outpace its peers and the index when markets are rallying.
As shown by an eye-watering loss of nearly 50 per cent in 2008 and a third-quartile drop of 2.17 per cent in 2011, the trust is punchier than the Invesco Perpetual counterpart and doesn’t offer the same level of downside protection.
Henderson owns companies like Royal Dutch Shell, Rio Tinto and GlaxoSmithKline in the top-10 holdings. The trust is trading on a premium of 4.6 per cent and has ongoing charges of 0.9 per cent, including a performance fee. It has ongoing charges of 0.62 per cent.
JP Morgan Income & Capital IT
With dividend growth of 5.4 per cent over the last five years, the JPMorgan Income & Capital investment trust is the third best in the sector.
The trust also has a dividend yield of 6.7 per cent, making it the highest yielding trust on this list.
The trust has outperformed its peers and the FTSE 250 ex IT index over the last three and five years since management due John Baker and Sarah Emily took the helm, though it has trailed other trusts in the sector over the last 12 months.
Since the managers took over in December 2008, the trust is up 117.75 per cent while the index gained 90.92 per cent, according to FE Analytics. The IT UK Equity Income sector made 126.03 per cent over the period.
Performance of trust vs sector and index since 2008
Source: FE Analytics
Among the top holdings in the portfolio are Royal Dutch Shell, HSBC and Vodafone, as well as pharmaceutical giants GlaxoSmithKline and Astrazeneca.
Financials are the largest sector weighting in the trust, as 25.6 per cent. Oil & Gas stocks make up the sector largest weighting, at just over 10 per cent of the portfolio.
The trust could be a good bet for investors looking to gain access to the battered oil and gas sector without going all out.
JPMorgan Income & Capital is trading on a discount of 1.55 per cent. The trust has a total expense ratio of 1.21 per cent.
The City of London investment trust, headed up by Job Curtis and the JPMorgan Claverhouse IT, which was recently taken over by manage , also has strong record of returning a growing dividend, though over the last five years, their dividend growth has been only in line with inflation.
