Increasing dividends is a highly regarded quality among many investment trust investors who depend on their dividends to meet their income needs. It is therefore not surprising that managers of trusts, as well as the fund houses to which they belong, are proud to show off that their dividends have been consistent as well as growing, sometimes for four decades or more.
The Association of Investment Companies (AIC), however, has found that some relative ‘young guns’ have also posted continuously rising annual pay outs for between 10 and 20 years, as they build up their longer-term track record.
The AIC found this “next generation of dividend heroes” includes a broad range of companies from diverse sectors, including UK Smaller Companies, Asia Pacific, UK All Companies and Europe as well as the UK Equity Income and Global sectors.
Cade, who is head of investment company research at Numis Securities, says two trusts on the list stand out for investors who want the ability to grow income.
“Perpetual Income & Growth has a very strong record at growing capital and dividends. Henderson Smaller Companies has also a lot of consistency having been run by Neil Hermon for 13 years. It has very good track record and seen a lot of dividend growth” he explained.
FE Alpha Manager Mark Barnett has run Perpetual Income & Growth since 1999, since when it has made a total return of 451.01 per cent compared to a sector average of 166.43 per cent and a gain in the FTSE All Share of 111.23 per cent.
Performance of trust, sector and index since 1999
Source: FE Analytics
Barnett’s £1bn trust, which is stuffed full of blue chip names such as BAT, Reynolds American and Imperial Tobacco, is neither the oldest or most established trust in the IT UK Equity Income sector but Cade backs the manager’s commitment to dividend growth.
Data from the AIC shows it has grown its dividend from 5p a share in 2003 to 11.8p in 2014.
Henderson Smaller Companies, meanwhile, has lifted its dividend for 11 consecutive years. It’s moved from 0.5p in 2003 to 11p last year.
The trust’s top holdings include Taylor Wimpey, Bellway and Paragon Group.
In total 17 investment trusts have managed to increase their dividends each year for at least the last 10 years, but under 20 years.
Schroder Income & Growth trust tops the list having increased its dividend for 19 straight years while the likes of Invesco Income Growth, Threadneedle UK Select Trust and F&C Capital & Income trust have done so for 17 years.
Source: FE Analytics
Unlike their open-ended rivals, which have to pay all of the income from their holdings at regular intervals, trusts can keep some in reserve making it much easier for them to increase their dividend year-on-year.
Gearing, another unique feature of trusts, can also help an investment trust increase its income, as leverage not only gives capital growth a boost but also the trust’s dividends. However, this can also amplify losses.
Annabel Brodie-Smith, the AIC’s communications director, said: “The AIC’s latest research demonstrates the strength of the investment company sector’s income record, with a fifth of members with 10-year histories, raising their dividends every year for 10 years or longer.”
“It’s encouraging to see that there is a new generation of dividend heroes that have formidable income track records, in addition to those companies that have been raising their dividends for decades.”
However, Cade says investors shouldn’t read too much into long-term dividend-growing trusts without knowing further detail, for example, on how long their managers have been at the helm.
“You need to be a little careful about just looking at the dividend growth and not really understanding what is happening underneath,” he said.
“For example, Threadneedle UK Select has changed dramatically having only just moved to Threadneedle a couple of years go. It used to be a completely different fund. There are a lot of trusts out there with a long track record but is not critical for ‘how long’ and more about how they are going to do so and what are their boards’ policies.”
“It is not absolutely crucial [to appear on such a list] because ultimately a lot of these trusts have changed management or strategy over the years. Throgmorton, for example, which is now owned by BlackRock, has been owned previously by several different people and there have been a lot of changes of managers in that time.”
However, he says many of the trusts on the list may well increase their dividends.
“Most of these trusts do have revenues in reserves and therefore can smooth their dividends over time and provide a stable income over the time.”
