More than 10 investment trusts have managed to increase their dividends every year over the past four decades, according to data released from the Association of Investment Companies, highlighting the attractiveness of closed-ended funds for genuine income-seeking investors.
The research also highlighted that out of a total of 412 investment trusts, a total of 36 closed-ended funds have also managed to increase their dividend pay-out each year for more than a decade.
Source: The AIC
An advantage that investment trusts hold over open-ended funds for those seeking income is the ability to hold reserves of up to 15 per cent of their gross annual income, which can be used to smooth dividends during times of volatility. Unit Trusts and OEICS, on the other hand, have to pay out all of their dividends they receive each year.
As such, some closed-ended investment vehicles have been able to provide investors with a growing dividend for a number of decades.
In an article published earlier this week, data from Numis found that the JP Morgan Claverhouse investment trust has the safest dividend in the UK equity income space as it has reserves of more than one year’s dividend payments. The trust has also been able to grow its dividend every year for 42 years running.
Will Meadon, co-manager of the trust, said: “When investing for income it’s so important to invest in prudent, well-managed companies which can grow profits through the current period of low inflation. We are in a world where strong companies are getting stronger and weak companies are falling by the wayside. The dividend skies for some UK companies are certainly darkening.”
“We hold a broad spread of financially strong companies which meet demanding investment criteria. Stocks such as Imperial Tobacco, Aviva and Next have provided the trust with very healthy dividend growth this year and several investments - Jupiter, ITV, Direct Line Insurance and Synthomer – have, in addition to good growth in ordinary dividends, also paid special dividends this year.”
In the entire AIC Investment Companies universe, however, it’s been found that the City of London Investment Trust has grown its dividends each year for the longest period of time at 49 years.
Hot on its tail though are Bankers Investment Trust, Alliance Trust and Caledonia Investments, all of which have increased their dividends annually over 48 years.
Annabel Brodie-Smith, communications director at the AIC, said: “This year’s pension changes means that some retirees will be looking for the additional flexibility that drawing an income from a portfolio can provide.”
“At a time when FTSE companies’ dividend cover is low, some investment companies have been able to increase their dividend year on year for decades, thanks to the sector’s unique ability to save some of the income received each year for a rainy day – a process known as ‘dividend smoothing’.”
“Investment companies, as part of a long-term well balanced portfolio, offer income-seekers something unique but are not for those who need a guaranteed income or cannot afford to lose any of their capital.”
Despite trusts being able to smooth their income, it is still important for managers to find attractive income opportunities in the first place.
Dominic Neary, who runs the Scottish American investment trust, says that one of the advantages he finds as a manager is being able to look for equity income opportunities globally. As such, he says that he has no need to be concerned by either the concentrated nature of the UK equity market or of any tribulations in specific sectors.
“Because our approach is both stock driven and global, in managing SAINTS’ equity portfolio we are able to cast our net wide in the search for dependable, growing cash flows from which companies will be able to pay dependable, growing dividends,” he explained.
“One notable source of exciting opportunities is the spread of sensors, and the huge growth in the computing power to process the information these provide. This is benefitting holdings like Linear Technology and Taiwan Semiconductor, as well as some of our industrial holdings, such as Atlas Copco.”
Scottish American Investment Trust has been growing its dividend for 35 years consecutively, and is one of five investment trusts to have delivered a growing dividend between 30 and 40 years – the other trusts are Merchants Trust, Scottish Investment Trust, Scottish Mortgage Investment Trust and Temple Bar.
The trust is 25 per cent geared, yields 4.3 per cent and has ongoing charges of 0.9 per cent. It is currently trading on a 1.1 per cent premium.
Performance of trust vs sector and benchmark over management tenure
Source: FE Analytics
Three trusts have increased their dividends annually for between 20 to 30 years – these are Value & Income at 28 years, F&C Capital & Income at 21 years and British & American at 20 years.
Angela Lascelles, who manages the £110m Value & Income trust, says that she is making the most of today’s volatile market conditions in order to find attractively-valued growth companies.
“These [companies] have been the foundation of our income producing equity portfolios. An early example of this opportunity was Vosper Thornycroft, valued in the particular recession in the early 1990s on a yield of 7 per cent with a strong balance sheet and three year order book,” the manager said,
“More recently there was a moment to buy Go Ahead Group at a price approximately half the current price. Often the chances occur in high quality companies included in the FTSE 250 index, and these companies very reliably continue to increase their dividends year after year. There are several companies now which fall into this category of growing companies currently rated as value stocks.”
Value & Income is 23 per cent geared, yields 3.9 per cent and is trading on an 18.4 per cent discount. It has an ongoing charge including a performance fee of 1.56 per cent.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
A total of 18 trusts have managed to grow their dividends every year for between 10 and 20 years, with the likes of Perpetual Income & Growth, Threadneedle UK Select Trust, Aurora, Invesco Income Growth, Northern Investors Company and Schroder Income Growth managing to increase their payout amounts for more than 15 years.
