Investors can cheer the arrival of a fresh dividend hero – as another investment trust has joined the ranks of those that have raised payouts every year for two decades.
Invesco Income Growth’s decision to once again raise its payout meant there are now 21 dividend heroes, the latest list from the Association of Investment Companies revealed today.
To make the cut trusts must lift their dividend for at least 20 consecutive years – meaning all on the list have raised payouts at least as far back as 1998, the year that the Good Friday Agreement was signed, the £2 coin arrived in our pockets, and David Beckham got sent off against Argentina in the World Cup.
But Invesco Income Growth has some way to go before it can match the records of the top three dividend heroes – City of London, Bankers and Alliance Trust, which have raised payouts for an astonishing 51 years in a row.
All of the investment trusts on the dividend hero list have raised payouts year-in, year-out for at least 20 years – taking them back to 1998 when David Beckham was sent off in the World Cup against Argentina, or in many cases much longer
The AIC’s dividend heroes list contains a number of income investing stalwarts but is not just made up of trusts that prioritise payouts to investors.
A pack of global and growth investment trusts also make the 21-strong list.
That includes the Foreign & Colonial, known as F&C, which this year celebrates its 150th anniversary – with investment trusts themselves marking the same birthday.
It has raised dividends for the past 47 years, although it does yield just 1 per cent – about the same as a mid-ranking savings account.
Investment trusts pool investors money together to invest in other companies’ shares, bonds or other assets, with a manager picking those to back. Unlike investment funds, however, trusts have their own shares traded on the stock exchange – which is how investors buy in.
Global trust Witan, with its 2.1 per cent yield, has racked up 43 years of rising dividends, while the hugely-popular growth-orientated Scottish Mortgage, which invests in some of the world’s leading tech companies, such as Tesla and Amazon, has 35 years of rising payouts, albeit it yields just 0.7 per cent.
There are 1O UK equity income investment trusts on the list, one global income trust, Scottish American, nine global trusts and one private equity trust, Northern Investors Company, which is in the process of winding up.
The average yield across all 21 dividend heroes is 3.99 per cent.
The secret to many investment trusts’ success in reliably raising dividends lies in their ability to hold over some money in the good times, to help cover dividend payments in the bad – something which investment funds cannot do.
That has allowed trusts such as City of London, which yields 4.2 per cent, to pay a generous and rising dividend through the Black Monday stock market crash of 1987, the dotcom bust at the turn of the millennium and the financial crisis crash of 2008 and 2009.
Holding out for a hero: Another investment trust Invesco Income Growth has joined the ranks of the dividend heroes
The ability to pay a robust dividend that can be relied upon to rise over time has made some income investment trusts increasingly attractive for investors retiring and keeping their pensions invested to provide an income.
This is something many more retirees are now doing due to the pension freedom reforms.
Annabel Brodie-Smith, communications director of the AIC, said: ‘We now have four dividend hero investment companies with more than half a century of dividend increases, an enviable achievement.
‘Investment companies have an important structural advantage, namely, they can squirrel away up to 15 per cent of the income they receive each year to boost their dividends in tougher times.
‘Whilst markets have seen volatility since the start of the year, interest rates remain historically low and income is very much in demand, with many investors relying on regular dividends for everyday spending and bills.’
|Investment trust||Sector||Consecutive years dividend increases||Yield|
|City of London Investment Trust||UK Equity Income||51||4.2|
|Bankers Investment Trust||Global||51||2.2|
|F&C Global Smaller Companies||Global||47||1|
|Foreign & Colonial Investment Trust||Global||47||1.6|
|Brunner Investment Trust||Global||46||2.2|
|JPMorgan Claverhouse Investment Trust||UK Equity Income||45||3.6|
|Murray Income||UK Equity Income||44||4.3|
|Witan Investment Trust||Global||43||2.1|
|Scottish American||Global Equity Income||38||3|
|Merchants Trust||UK Equity Income||35||5.2|
|Scottish Mortgage Investment Trust||Global||35||0.7|
|Scottish Investment Trust||Global||34||2.4|
|Temple Bar||UK Equity Income||34||3.4|
|Value & Income||UK Equity Income||30||4.3|
|F&C Capital & Income||UK Equity Income||24||3.4|
|British & American||UK Equity Income||22||14.7|
|Schroder Income Growth||UK Equity Income||22||4.1|
|Northern Investors Company*||Private Equity||21||13.4|
|Invesco Income Growth||UK Equity Income||20||4.1|
|Source: Association of Investment Companies March 2018|
How to health check investment trust dividends
When investing for income it always pays to check up on not just how big a dividend is – but also how healthy that payout looks.
The AIC website’s tables offers a wealth of data on investment trusts and it is possible to check the health of their dividends there.
Most investment trusts will pay a dividend based on the income that they receive regularly from the company shares held by the trust, they may also choose to pay out a higher dividend by tapping into some of the growth delivered by the rise in value of those shares.
The revenue reserve is the rainy day fund that can help back dividends when times are bad – it is made up of income earned in previous years but not paid out.
It is unlikely that all of this would ever need to be called on in one go, as even if the companies held by a trust cut their dividends they would be very unlikely to all go to zero.
Dividend cover shows how many years the revenue reserve can last, based on the last financial year’s dividends.
Another figure to check up on is the five-year dividend growth figure, which averages out the rise over that period.
Investors should also be aware that trusts can borrow money to invest, which boosts returns in the good times but can magnify falls in the bad. The level of this is shown in the gearing figure – the higher it is the more that is borrowed.
Premiums and discounts
Trusts can also trade at a premium or discount to the value of all their holdings – so the price can be higher or lower than the sum of their parts. Sometimes a discount offers an opportunity to buy in at a knock down price, but some trusts and sectors tend to have perennial discounts.
It is wise to check how current discounts and premiums compare against their history.
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