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The investment trusts with the safest dividends

05 October 2015

Using data from Numis, we examine investment trusts to see which have the most protection in place when it comes to income payouts.

By Gary Jackson,

Editor, FE Trustnet

The JP Morgan Claverhouse investment trust has the safest dividend in the UK equity income space as it has built up the largest reserves to cover future payouts, research by Numis suggests, although investors with a real eye on income security might want to take a look at the global sector.

Advocates of investment trusts frequently point out that the closed-ended structure has a number of advantages over an open-ended fund when it comes to income investing and note that some trusts have been able to grow their dividend for more than 40 years without pause.

One of the most important of these features is the ability to ‘smooth’ dividends by holding back up to 15 per cent of gross annual income to bolster a payout in tough years.

Numis said: “The ability to build up a safety net of revenue reserves in good times to support dividends in lean years has enabled investment companies to smooth dividends over time.”

“For instance, most investment companies maintained dividend growth through the 2008/09 global financial crisis, at a time when many open-ended funds were forced to cut dividends.”

UK equity income trusts’ dividend security

 

Source: Numis

As can be seen from the above scatter chart, Sarah Emly and William Meadon's JP Morgan Claverhouse investment trust has built up the largest reserves with more than one year’s dividend payments, or £11.64m, put aside. In addition, dividend in the year ending December 2014 was fully covered.

Over five years its average annual dividend growth has been 4.2 per cent and it is currently yielding 3.8 per cent, according to the AIC. The trust has grown its dividend for 42 years running.

Numis deems JP Morgan Claverhouse to be “well suited as core holding for investors seeking income from mainstream UK equity exposure”. Its top holdings tend to be UK income stalwarts such as Royal Dutch Shell, British American Tobacco and AstraZeneca, although Lloyds is its third largest position.

It has ongoing charges of 0.68 per cent (rising to 0.77 per cent when the performance fee is included), is 17 per cent geared and is trading on a 7.7 per cent discount to net asset value (NAV).


 

Next up is Jeremy Whitley and Ben Ritchie’s Dunedin Income Growth, FE Alpha Manager Mark Barnett’s Edinburgh and Julian Cane’s F&C Capital & Income investment trusts, which are all holding around 9.5 months of dividend payments in revenue reserves. Numis says these are “significant” reserves.

Performance of trusts vs sector and benchmark over 5yrs

 

Source: FE Analytics

Dunedin Income Growth has £13.42m set aside to support dividends; it’s currently yielding 5 per cent, which is among the highest of the AIC’s UK Equity Income sector where the average is 3.9 per cent, and has grown its dividend by an average of 2.1 per cent over the last five years. It also has a fully covered dividend.

Managed by Aberdeen, it focuses on high quality companies with above average yield but supplements its income with option writing. Its top holding is British American Tobacco, followed by GlaxoSmithKline and Unilever.

The trust is trading on a 6.7 per cent discount to NAV, has ongoing charges of 0.63 per cent and is 9 per cent geared.

The Edinburgh investment trust was managed by Neil Woodford between September 2008 and 27 January 2014, with Barnett taking over after this date. It is the largest trust in the AIC’s UK Equity Income sector at £1.3bn in size.

Some of the portfolio’s largest holdings are British American Tobacco, AstraZeneca and BP but Numis points out that the trust looks very different to the FTSE All Share. For example, its largest holding is US firm Reynolds American, the FTSE 100 makes up just 50 per cent of the portfolio and around one-quarter of its income was generated from overseas stocks.

Edinburgh is yielding 3.4 per cent while its average annual dividend growth has been 2.8 per cent over the past five years. It’s trading on a 2.3 per cent premium, is 14 per cent geared and has ongoing charges of 0.61 per cent.

F&C Capital & Income has fully covered its dividend every year since 2010 and has managed to grow its payout in each of the past 21 years.

The trust focus on UK blue chips, counting the likes of HSBC, GlaxoSmithKline, Royal Dutch Shell, Diageo and Unilever as major holdings. Cane has a cautious approach and is underweight areas such as oil & gas and basic materials, which have had a troubled recent past. 

With a current yield of 3.9 per cent, the trust has posted five-year annual dividend growth of 2.9 per cent. It trading on a 2.7 per cent premium, is 10 per cent geared and has ongoing charges of 0.65 per cent.

However, those looking in the global investment trust sectors will tend to find more security over their dividends – although the actual payouts are likely to be lower than can be garnered from the UK.


 

Numis said: “Broadly, global investment companies have higher revenue reserves than UK equity income investment companies due to less pressure to pay out dividends. The level of revenue reserves varies widely, although most global investment companies have over a years’ dividend in reserves.”

“Arguably, Caledonia has the safest dividend in the sector with revenue reserves of over 10 years’ dividend after reconstructing into an investment trust in 2003.”

Global investment trusts’ with revenue reserves over one year

 

Source: Numis

The firm says Caledonia takes a “unique approach” by splitting its portfolio into four pools of quoted stocks (29 per cent of assets), unquoted stocks (33 per cent), funds (20 per cent) and income & growth global equities (13 per cent).

The trust has grown its dividend for 48 years running. According to the AIC, it is yielding 2.3 per cent and has grown its dividend by an annual average of 6.4 per cent over five years.

Despite this and its outperformance of its sector and benchmark over one, three and five years in total return terms, it is trading on a 19 per cent discount. Caledonia has ongoing charges of 1.30 per cent, which includes a performance fee, and is not geared.

In a coming article, FE Trustnet will look at Numis highly rated trusts for those seeking income from a range of geographies and sectors.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.