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Holding out for a hero – a dividend hero. The investment trusts on the front line against delivering income

Annabel Brodie-Smith, Communications Director, Association of Investment Companies


“I need a hero – I’m holding out for a hero ‘till the end of the night”. As a teenager in the mid-80s it’s hard to forget these immortal words being belted out by a fellow Welsh woman, Bonnie Tyler. It turns out that “heroes” is a popular song theme prompting a fierce debate in the office on the best ‘hero’ song. Heroes are also much admired amongst investment trust fans, namely dividend heroes.

There are twenty-one dividend hero investment trusts (See Table) which have increased their dividends every year for twenty years and over. Four of these, City of London, Bankers, Alliance and Caledonia have consecutively increased their dividends for over 50 years. This is due to investment trusts’ unique structural advantage, allowing them to squirrel away up to 15% of the income they receive each year into their revenue reserve to distribute in tougher times.

Investment trusts also have another benefit when it comes to income as they invest in a wider range of investments that can generate a higher income. Their closed-ended structure allows them to invest in illiquid assets like property, infrastructure, renewable energy and illiquid forms of debt. This is demonstrated by the Property Direct UK sector, which has been one of the most popular sectors for advisers since the Brexit referendum caused many property open-ended funds to be suspended. This sector has an average yield of 4.8% and is up 118% over the last ten years.

Finally, investment companies, unlike open-ended funds, have another income advantage – they don’t have to pay dividends just from the income they receive from investments but can pay dividends from capital profits. This flexibility helps meet shareholder demand for income in this low interest rate environment and potentially can lead to investment companies being re-rated to trade on lower discounts. Clearly investment trust boards have an important role to play, ensuring any change in dividend policy is in shareholders’ best interests. So if you too are holding out for a hero, investment companies may be for you.

Company Sector Number of
consecutive
years dividend
increased
Dividend
yield as at
28/02/18
(%)
City of London Investment Trust UK Equity Income 51 4.2
Bankers Investment Trust Global 51 2.2
Alliance Trust Global 51 1.9
Caledonia Investments Global 50 2.0
F&C Global Smaller Companies Global 47 1.0
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 3.0
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

*Please note Northern Investors Company is winding up

To find out more about dividend information for member investment companies visit: https://www.theaic.co.uk/financial-advisers/findcompare-investment-companies.

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