Many investment trusts have shown their income-generating mettle in the past year, making these funds stand out against a backdrop of UK corporate dividends falling 41% in response to the pandemic.
Unlike open-ended funds, investment trusts are able to stash 15% of annual income for revenue reserves, which gives them some dry powder to reinforce returns in leaner years.
With fewer than 10% of financial advisers recommending investment trusts regularly to client and funds still having a considerably higher profile despite the dividend performance of trusts, Dzmitry Lipski, head of funds research at fund platform Interactive Investor, stresses that it is important for investors to “have an open mind” and look at trusts and funds side by side.
“Many investment trusts have proved to be heroes for income investors time and again and they are worth considering as part of a diversified portfolio.”
The Association of Investment Companies (AIC) this week published the latest list of its 19 dividend heroes, the investment companies which have increased their dividends for every one of the past 20 or more years.
Going further, there are six dividend super-heroes trusts that have increased dividends for 50 or more consecutive years.
This elite sextet is: City of London Investment Trust PLC (LON:CTY), Bankers Investment Trust PLC (LON:BNKR) and Alliance Trust PLC (LON:ATST), which lead the way with 54 years of consecutive increases, followed by Caledonia Investments PLC (LON:CLDN) at 53, then BMO Global Smaller Companies (LON:BGSC) and F&C Investment Trust PLC (LON:FCIT) both on 50.
Behind these titans of progressive income policies, another very impressive five investment trusts have increased dividends for more than 40 consecutive years and another four have raised dividends for more than 30 consecutive years.
In the first few months of 2021, seven dividend hero investment companies have announced another year of dividend increases, including F&C and Alliance Trust announced this month, with Witan Investment Trust plc (LON:WTAN), The Scottish American Investment Co PLC (LON:SAIN) and Brunner Investment Trust PLC (LON:BUT) in February and JPMorgan Claverhouse Investment Trust PLC (LON:JCH) and Bankers in January.
Last year 85% of equity income-paying investment companies increased or maintained their dividends, showing that income resilience is not limited to the dividend heroes.
And for income hunting investors comparing investment trusts with unit trusts, this compared to 23% of income-paying open-ended funds.
“Investment companies’ ability to save up to 15% of their income each year to boost payouts in difficult years is a huge income advantage,” says the AIC’s Annabel Brodie-Smith.
“It has helped the dividend heroes achieve their remarkable track records of consistent dividend growth, with four stretching as far back as the 1960s.”
Though dividends are never guaranteed, “the moral of the story is do not overlook investment trusts when constructing a dividend portfolio – they have the ability to help power income portfolios,” says Interactive Investor's Lipski.
With fewer than 10% of financial advisers recommending investment trusts regularly to client and funds still having a considerably higher profile despite the dividend performance of trusts, Lipski stresses that it is important for investors to “have an open mind” and look at trusts and funds side by side.
“Many investment trusts have proved to be heroes for income investors time and again and they are worth considering as part of a diversified portfolio.”
Indeed, investment trusts account for six out of 10 holdings in Interactive Investor’s Active Income model portfolio, making up 55% of the portfolio by asset allocation.
With two AIC dividend heroes in the form of City of London and Bankers, the other four are Murray International Trust plc (LON:MYI); Utilico Emerging Markets Trust PLC (LON:UEM); BMO Commercial Property Ltd (LON:BCPT) and Standard Life Private Equity Trust PLC (LON:SLPE).
However, for funds investing in certain sectors there’s been no escaping the pandemic, with the BMO Commercial Property suspending its monthly payments last April over uncertainty on rental receipts in the teeth of the pandemic. In August, the dividend was reinstated, albeit at a lower rate. In December, the trust announced an increase on recent monthly interim dividends equating to 70% of the original monthly rate paid up until March 2020.