The income edge for trusts versus funds came into its own during the financial crisis and Covid-19.
Over the last year, most ‘dividend hero’ investment trusts continued increasing income payments to shareholders.
The annual list of investment trust dividend heroes, which was published on 15 March by the Association of Investment Companies (AIC), shows that 19 have 20-year plus track records of consistently upping dividend payments. This is slightly down on a year ago, when 21 trusts were dividend heroes.
Exiting the list are Perpetual Income & Growth, British & American (LSE:BAF) and Temple Bar (LSE:TMPL). Perpetual Income & Growth merged with Murray Income (LSE:MUT) last November, while in the autumn the board of Temple Bar announced a 25% dividend cut at the same that it revealed it would be changing fund management group. RWC Partners took over the trust at the end of October.
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Winning promotion to dividend hero status is Aberdeen Standard Equity Income (LSE:ASEI), which has now raised dividends for 20 years on the spin.
The investment trust structure allows trusts to set aside 15% of their annual income for tougher times via their revenue reserves. Open-ended funds do not have this capacity, which is why investment trusts have more impressive dividend track records.
The structural advantage came into its own during the global financial crisis and again during the Covid-19 pandemic. Boards dipped into their reserves to top up income shortfalls from underlying investments so that they could maintain their long track records of raising their dividend year in, year out.
Owing to the Covid-19 pandemic, UK dividends declined by two-fifths in 2020. This marked the worst period for payouts since the Second World War, according to the UK Dividend Monitor report from Link Group.
Global dividend declines were less severe than in UK, at 12%. However, this was a significant headwind for funds and trusts that return income to investors as part of their mandate.
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In recent weeks, a number of dividend heroes have pledged to continue drawing on their reserves if an income shortfall continues.
F&C Investment Trust (LSE:FCIT), one of interactive investor’s Super 60 choices, announced its 50th annual increase last week. It said that despite drawing on reserves, it has plenty left in the bank with one year’s worth of annual dividends available.
Five other trusts have raised dividends for 50 year or more. City of London (LSE:CTY), Bankers (LSE:BNKR) and Alliance Trust (LSE:ATST) lead the way with 54 years of consecutive increases. Caledonia Investments (LSE:CLDN) and BMO Global Smaller Companies (LSE:BGSC) follow, with 52 and 50 years of respective dividend hikes.
Figures from the AIC show that 85% of income-paying trusts (with yields above 1%) increased or held dividends in 2020. In contrast, only 23% of open-ended funds increased their dividends.
Investment trust dividend heroes
Source: AIC and Morningstar. *Value and Indexed Property Income will shortly move to the Property – UK Commercial sector.
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