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Investment trusts 101 - who are the London-listed dividend heroes?

Here we take a look at the so-called 'dividend heroes' and the importance of distributions to shareholders

City of London Investment Trust -

Dividend heroes are investment companies that have increased their pay-outs for at least 20 years.

The London Stock Exchange boasts 21 of them, according to a list compiled by the Association of Investment Companies (AIC).

Of these, four have increased the divi for over half a century. City of London Investment Trust PLC (LON:CTY), Bankers Investment Trust PLC (LON:BNKR) and Alliance Trust PLC (LON:ATST) have done so for 53 years.

“To put this in perspective, this means they have been increasing their dividends every year since the Beatles released Sgt. Pepper’s Lonely Hearts Club Band,” said Annabel Brodie-Smith, communications director of the AIC.

“With the difficulties facing markets at the moment, the power of investment companies to deliver rising dividends is reassuring for investors.”

Caledonia Investments PLC (LON:CLDN), meanwhile, has a 52-year record of uninterrupted income growth, while a further seven heroes have upped their dividend for over 40 years, and five more have been doing so for at least three decades.

How can they do that?

The advantage of investment companies is that they can stash up to 15% of their income every year to use during leaner times, such as the 1987 crash, the bursting of the dot.com bubble at the turn of the century and the financial crisis from 2008 on.

Therefore, trusts will raise their dividends even though the companies they are investing in are suspending them, just as is happening during the coronavirus pandemic.

It’s not an unusual practice. Job Curtis, fund manager of City of London, revealed last September that he had accessed the rainy-day pot to reward investors seven times during his 27-year tenure at the firm.

A less common practice is selling investments and distributing proceeds as dividends, though it can hinder the trust’s prospects for growth.

Why are dividends important?

When they choose where to place their money, many investors look at the dividend history when assessing a stock’s future return potential.

The cash distribution has always been a sign of a company’s wealth and prospects, even though transparency has increased over the years with earnings reports and trading updates.

Investors are likely to stick with a company that provides annual payments they can count on, particularly if theirs is a safety-first strategy. A well-established enterprise will pay a regular dividend, while younger ventures tend to reinvest the capital to grow.

The dividend yield

This metric is calculated by dividing the annual dividend income per share by the current share price.

If a company has a low dividend yield compared with its competitors, it can be because the share price is high as the stock is in demand, or the firm is struggling to pay investors.

Conversely, a high dividend yield could also mean the company has oodles of money to hand back. Conversely, it can be a sign of distress with the share price flying low, artificially inflating the yield. This is why it is always good practice, particularly with traditional companies, to assess the dividend yield alongside a firm’s dividend cover (which measures the business ability to meet the next divi payment). However, we’ll leave that to later explainers.

Compounding

Dividends can be reinvested to buy more shares in the company to generate extra earnings over time. Growth will be exponential because the new shares will bring in more dividends each year - provided the trust pays investors.

Double compounding occurs when dividends are reinvested in dividend growth stocks, such as dividend heroes.

Who are the next heroes?

Although it takes at least two decades to become a hero, some investment trusts are working their way up to the cape.

Fidelity Special Values PLC (LO:FSV), Lowland Investment Company plc (LON:LWI), Schroder UK Mid & Small Cap Fund PLC (LON:SCP), Law Debenture Corporation PLC (LON:LWDB), Tetragon Financial Group Limited (LON:TFG) and CQS New City High Yield Fund Ltd (LON:NCYF) are this year’s new joiners in the hero-to-be list, which counts 25 trusts in total.

Combined with the existing 21 heroes it gives a total of 46 investment companies, or 14% of the UK sector, raising dividends for at least ten consecutive years.

Quick facts: City of London Investment Trust

Price: 338.98 GBX

LSE:CTY
Market: LSE
Market Cap: £1.41 billion
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