Dividends paid by investment trusts fell slightly in the first half of 2021, according to new research, though these listed funds have still outperformed the wider market in terms of payouts since the start of the pandemic.
In the first six months of the year, £891.9mln was paid out in dividends from listed investment companies, which was down £29mln or 3.1% on the same period a year earlier, according to calculations from the Link Group.
This followed a record second half of the year in 2020 but was the first decline since 2010, when cuts were maid in the fall-out from the global financial crisis.
Comparing the performance to the wider UK stock market, dividends so far in 2021, excluding one-off specials payouts, rose by 8.0% compared to the mass cutting and postponing of payouts seen a year ago.
Investment trust dividends generally lag behind the wider market as they are paid from dividends distributed by companies held in the trusts, Link noted.
In the 18 months since January 2020, there was a 34.6% fall in Link's index of UK dividends on an underlying basis, while global dividends slipped 5.9%. But during this period, the equivalent index of investment trust dividends rose 2.0%.
Trusts were able to beat the market as they had accumulated reserves of £2.1bn that they had put away for a rainy day, of which £1.8bn was still in place by last month, meaning that £22 in every £100 of dividends distributed by investment trusts over the last 12 months has been funded from reserves.
Pretty much every other trust has dipped into their reserves so far.
Looking forward to the second half, Link estimates that trusts will pay £1.79bn in total for the whole of 2021, down 3.2% on last year as the income received from their investments rebounds but still leaves a shortfall compared to pre-pandemic levels.
When investment companies investing in alternative assets are included, dividends across the whole sector rose by 11% during the period. This demonstrates the importance of having a balanced income portfolio, the Association of Investment Companies (AIC) pointed out.
“Investment trust dividends cannot defy gravity, but they do come with a very plump cushion," said Link director Ian Stokes.
“Not only do they keep cash in reserve, but they can also bank some of the big capital gains they have made over the last year and hand these out to shareholders too.
“It is one of the most reassuring features of investment trusts that they can smooth out the peaks and troughs in dividend income caused by the economic cycle or big one-off shocks. The amazing stability of investment trust dividends through the pandemic is a testament to this flexibility."
Ian Sayers, chief executive of the AIC), flagged that 2020 had seen 85% of equity income-paying investment companies increase or maintain their dividends to shareholders despite the impact of the pandemic, while 23% of equity income-paying open-ended funds (unlisted unit trusts) increased their dividends in 2020 and none held dividends at the same level as 2019.
“As Link’s Investment Trust Dividend Snapshot highlights, investment companies have important income benefits. Investment companies can hold back dividends from investee companies in a revenue reserve and distribute these dividends to shareholders in tough times such as the pandemic,” Sayers added.
The top-paying trust in the first half was the City of London Investment Trust (LSE:CTY), followed by Murray International Trust and Templeton Emerging Markets Investment Trust.