Investment trusts delivered a 4.2% increase in dividends in 2020, a critical source of income during a year when global payouts crashed.
The London Stock Exchange-listed funds paid out a record £1.88bn last year, an extra £87mln compared to the previous 12 months, according to research by Link Group.
This was in a year when UK companies cut dividends 38% and global dividends fell 12.2%, according to Janus Henderson’s Global Dividend Index.
READ: UK and US investment trusts and funds perform best during coronavirus crisis
During the most painful crisis months of April to December, when blue chip and other company dividend were dropping like flies, 77% of investment trusts investing in equities raised payouts or held them steady, Link found.
Looking at which sub-sectors paid the most, the global equity sector accounted for a third of the dividend growth, hiking payouts 9.3%, while those investing in UK equities raised payouts 3.8%.
Over the past 10 years, investment trust have increased their total dividend by 123%, growing every single year.
The key in 2020 was that unlike open-ended funds, investment trusts have the ability to save income in a revenue reserve.
Prior to the crisis these closed-ended funds boasted cash reserves worth £1.6bn, the researchers said, of which around £700mln ha been used to support dividend payouts during the crisis.
Some of the trusts to confirm increases included 15 'dividend heroes' with an unblemished record of dividend growth over several decades and within that group six that have upped their payout for at least five decades: City of London Investment Trust PLC (LON:CTY), Bankers Investment Trust PLC (LON:BNKR), Alliance Trust PLC (LON:ATST), Caledonia Investments PLC (LON:CLDN), BMO Global Smaller Companies (LON:BGSC) and F&C Investment Trust PLC (LON:FCIT).
Global equity trusts had revenue reserves worth two years of dividends before the pandemic, while UK-focused trusts had a year’s worth.
“The more internationally diversified trusts are, the less they have been exposed to the steepest dividend cuts,” said Susan Ring, chief executive of Link Group UK.
She said continued dividend growth is likely in 2021 from global trusts, with Asia-Pacific and Japanese regional trusts focused on parts of the world where the economic impact of the pandemic has been less severe.
“Elsewhere, European trusts cut early so we do not see significant further downside from them.
“Trusts focused on UK equities are more vulnerable. They still enjoy the cushion of long-accumulated reserves, but prudence suggests some cuts are likely as dividends from UK companies are going to take some time to regain previous highs.”
Older, most established investment trusts have had decades to build up revenue reserves and this is serving them well now, said Ian Sayers, CEO of the Association of Investment Companies.
“Investment trust investors, particularly those in retirement, often value consistency above all else when it comes to the income they expect from their holdings. There is no doubt the sector has delivered that over the last decade and has proved its mettle in the 2020 crisis too.”
He said he expects resilience overall, but said investment trusts are not immune to the pandemic.
“Independent boards across the industry are discussing with fund management teams how best to weather the dividend drought. Some trusts have cut their dividends and we may yet see more follow suit. Boards will want to be sure the long-term interests of the investors are protected.”
The past year showed why investment trusts should be a core part of their portfolio for any investors looking for reliable income, said James de Sausmarez, director and head of investment trusts at Janus Henderson Investors.
“Unlike open-ended funds, investment trusts have the ability to save income in a revenue reserve in years of plenty and then dip into it in those rainy day years to at least maintain and often increase the dividend for shareholders. 2020 was just such a year and the level of dividend increases were influenced by both the size of each company’s revenue reserve and the board’s view of how quickly revenues would recover.”