Trusts offer best bet for regular dividend payouts

Not surprisingly, given the precarious state of the economy, interest rates were kept on hold once again last week. While this is great news for borrowers, savers are still scratching their heads as the quest for yield becomes tougher.

One of the consequences of the low interest rate environment is that investors looking for yield have had to widen their search and their risk appetite. It is no coincidence that many investment companies with higher income yields are trading either close to par, or on premiums, such is the appetite for income.

This does not simply extend to the traditional income-paying sectors such as UK Growth & Income (which was on a premium of nearly 2 per cent at the end of August 2011). Indeed the Specialist: Infrastructure sector was also nearly touching a premium of 2 per cent.

While it is always worth doing your homework, it is also worth remembering that investment companies have an enviable track record when it comes to dividends. Investment trusts can retain up to 15 per cent of the income they receive each year and transfer this to their reserves.

These retained dividends are transferred to the revenue reserves and are used to boost dividends in difficult years. Known as "smoothing" dividends, this is one of the defining characteristics of the sector. As a result of this trait, the sector houses some impressive dividend track records, with one company, City of London, boasting 45 years of increasing dividends and a further nine companies having increased their dividends year-on-year for more than 30 years.

Looking at shorter-term dividend growth, it is interesting, given the issues in the eurozone, to see that the Europe sector has seen the fastest five-year annual dividend growth, with an increase of 20.3 per cent per year, followed by Commodities and Natural Resources, with an average five-year annual dividend growth of 15.1 per cent.

Clearly, dividend growth and dividend yield are not the same thing and many of the companies that posted the highest levels of growth were starting from low bases. For example, the average yield of the Europe sector is 2.2 per cent. An exception is the Global Growth & Income sector, which has one of the highest average dividend yields at 4.4 per cent, and has also seen some of the strongest dividend growth over the last five years.

The fastest dividend growth of an individual company was Gartmore European, with a stellar increase of 52.5 per cent per annum over five years. The company also has one of the highest yields in the sector, at 3 per cent.

Such strong growth might seem at odds with what we know about the economic health of the eurozone and the sovereign debt crisis. However, Stephen Macklow-Smith, manager of JP Morgan European Investment Trust, says: "The fact that Europe has seen the fastest dividend growth shows that the volatility caused by the eurozone crisis is masking the truth that European companies are in an excellent globally competitive position with strong balance sheets."

"They are currently trading at attractive valuations, and with the euro trading at highly competitive exchange rates, these companies are benefiting. We expect to see news around European dividends remain positive."

Managers emphasise stock selection and urge investors to keep their sights set on the long-term. Patrick Edwardson, manager of Scottish American Investment Company (SAINTS), said: "The economic and political picture in individual countries will always be uncertain and the difficulties facing Europe and some other developed economies are significant."

"But growth elsewhere in the world is strong and that means many companies can still look forward to rising sales and good profits. What’s more, a lot of companies have spent the last few years building up cash reserves and reducing their reliance on borrowed money. Because of this, they should be able to withstand short-term economic headwinds and set their dividends to reflect long-term prospects."

With such uncertainty in global markets, investors are "battening down the hatches" and preparing for the long-haul. And while markets may prove to be on a somewhat turbulent trajectory, having the reassurance of a consistent dividend is one that many investors will welcome.

Annabel Brodie-Smith is communications director at the AIC. The views expressed here are her own.