Don’t dismiss investment trusts for income

Almost half of investment trusts in both the UK Growth & Income and Global Growth sectors have raised their dividend every year for the past two decades, research from the AIC shows.

Three investment companies have raised their dividend each year for the last 45 years; City of London, Alliance Trust, and Bankers Investment Trust. They are currently yielding 4.55 per cent, 2.33 per cent and 3.05 per cent respectively, according to FE Analytics.

The research follows research from Dennehy Weller & Co that shows more than a third of funds in the open-ended sector cut their dividend last year, despite US companies upping their yield.

Foreign & Colonial Investment Trust yesterday raised its dividend for the 41st year in a row, Alliance Trust this morning increased its dividend and Brunner has recently racked up 40 years of annual dividend increases.

The £1.2bn Witan Investment Trust, run by Andrew Bell, announced last month its 37th annual dividend increase. Data from FE Analytics shows the trust’s historic yield is 2.45 per cent.

Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC), said: "The investment company sector has a long and proud history of delivering returns for shareholders and what many shareholders are increasingly looking for is a reliable dividend in unreliable times. Investment companies have been aware of the importance of yield for years and the sector’s dividend track record is unparalleled."

"Of course dividend increases can never be guaranteed, but investment trusts have a structural advantage over other funds because they are able to squirrel away up to 15 per cent of the income they receive each year into their revenue reserves to help boost dividends in more difficult years."

This dividend-smoothing policy means that many investment trusts are able to continue to pay and boost dividends when times get tough, which is how Witan was able to up its dividend this year.

Charles Luke who manages Murray Income Trust says dividend payouts look set to slow this year.

"We expect many companies to continue to deliver solid dividend growth in 2012. However, for some companies the realities of the global macro-economic environment will put pressure on earnings and consequently the dividends they pay," he said.

"In aggregate, payout ratios remain low compared with history so many companies are not over-distributing and strong balance sheets suggest that financial distress is unlikely - both of these factors provide reassurance for the outlook for dividends."