Research for interactive investor examined whether 19 investment trusts have beaten inflation over the past five years in terms of dividend growth, share price and net asset value (NAV) returns.
The minimum aim of every investor should be to ensure that over the long term the returns they receive from their investments are above and beyond the rate of inflation.
There’s plenty of debate over whether inflation will cool in the coming months given that core inflation continues to surprise on the upside. As far as investors are concerned, staying ahead of price rises has become more difficult than usual.
In April 2021, the Consumer Prices Index (CPI) stood at 1.5%. Fast-forward two years and the inflation reading stands at 8.7%, having peaked at 11.1% in October 2022.
In the face of high inflation, there’s plenty of appeal in sizing up ‘dividend hero’ investment trusts in the hope that boards will continue to increase income payments to maintain their reliable dividend records.
In total, there are 19 investment trusts with dividend hero status, having raised payouts for at least 20 consecutive years. Of those 19, eight have increased their dividends for 50 or more consecutive years.
Such consistency is highly prized by investors, with many of the dividend heroes regularly featuring in our monthly most-bought investment trust league tables, including City of London (LSE:CTY), Alliance Trust (LSE:ATST), Merchants Trust (LSE:MRCH), F&C (LSE:FCIT) and Scottish Mortgage (LSE:SMT). Although the latter is mainly bought by investors due to its pursuit of delivering high growth over the long term.
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However, there’s a couple of drawbacks for investors buying the dividend heroes for income generation. In some cases, the dividend yields are low – with some below 2%. In addition, at times there’s been instances of dividend increases being meagre to simply keep the hero status.
With this in mind, we asked investment trust analyst QuotedData to crunch some numbers to find out how the 19 dividend heroes fared over the past five years versus inflation, factoring in dividend growth, the net asset value (NAV) performance, and the overall shareholder total return.
Over the five-year period – to the end of May – the hurdle the investment trusts had to overcome was 21.9%, as this was the measure of CPI over that period.
How the 19 dividend heroes fared against inflation
|Investment Trust||Sector||Div yield (%)||5-year div growth (%)||Beat inflation?||5-year NAV (%)||Beat inflation?||5-year share price total return (%)||Beat inflation?|
|City of London (LSE:CTY)||UK Equity Income||5.20%||10.30%||No||18.30%||No||17.70%||No|
|Alliance Trust (LSE:ATST)||Global||2.40%||77.00%||Yes||46.50%||Yes||47.50%||Yes|
|Caledonia Investments (LSE:CLDN)||Flexible Investment||2.00%||317.50%||Yes||67.20%||Yes||43.30%||Yes|
|The Global Smaller Companies Trust (LSE:GSCT)||Global Smaller Companies||1.30%||71.50%||Yes||20.80%||No||7.90%||No|
|F&C Investment Trust (LSE:FCIT)||Global||1.50%||63.00%||Yes||46.70%||Yes||40.40%||Yes|
|JPMorgan Claverhouse (LSE:JCH)||UK Equity Income||5.20%||16.40%||No||7.80%||No||4.40%||No|
|Murray Income Trust (LSE:MUT)||UK Equity Income||4.30%||8.30%||No||30.30%||Yes||34.40%||Yes|
|Scottish American (LSE:SAIN)||Global Equity Income||2.60%||18.60%||No||68.90%||Yes||64.10%||Yes|
|Merchants Trust (LSE:MRCH)||UK Equity Income||5.00%||7.90%||No||29.50%||Yes||35.70%||Yes|
|Scottish Mortgage (LSE:SMT)||Global||0.60%||19.50%||No||69.50%||Yes||33.60%||Yes|
|Value and Indexed Property Income (LSE:VIP)||Property - UK Commercial||6.00%||9.50%||No||12.20%||No||1.80%||No|
|CT UK Capital and Income (LSE:CTUK)||UK Equity Income||3.90%||7.30%||No||10.20%||No||3.70%||No|
|Schroder Income Growth (LSE:SCF)||UK Equity Income||3.90%||11.90%||No||14.10%||No||26.20%||Yes|
|abrdn Equity Income Trust (LSE:AEI)||UK Equity Income||7.00%||18.20%||No||-14.90%||No||-12.90%||No|
|Athelney Trust (LSE:ATY)||UK Smaller Companies||4.90%||7.90%||No||-1.20%||No||-5.70%||No|
|BlackRock Smaller Companies (LSE:BRSC)||UK Smaller Companies||3.00%||30.40%||Yes||3.50%||No||-0.60%||No|
Source: QuotedData. Past performance is not a guide to future performance.
Seven deliver dividend growth ahead of inflation
As the table above shows, in terms of dividend growth, which was measured by calendar year to the end of 2022, seven of the 19 outstripped inflation. In five of the seven cases, excluding BlackRock Smaller Companies and Witan, the dividend yields are 2% or lower.
As David Johnson, analyst at QuotedData, says the high dividend growth figures for low-yielding trusts “reflects the fact that it started from a low nominal base”. In the case of Caledonia, a bumper special dividend paid in 2022 gave its dividend growth figures a big boost. If this was stripped out, Johnson points out, it would have a “more modest 12.5% dividend growth over the last five years, which would place it in the bottom half of the dividend heroes”.
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In terms of NAV – the performance of the underlying investments – 10 of the 19 outperformed inflation. The more growth-focused strategies led the way, but among those in the 10 are two of the highest-yielding dividend heroes: Merchants and Murray Income Trust.
For share price total returns, nine of the 10 also outperformed inflation, with the exception being Witan. Those nine trusts are joined by Schroder Income Growth, which beat inflation in terms of share price gains but not on the NAV measure.
Both share price total returns and NAV returns are to the end of May.
Three trusts complete the hat-trick
Overall, just three of the 19 trusts - Alliance Trust, Caledonia Investments and F&C Investment Trust - completed the hat-trick of beating inflation on all three measures of dividend growth, NAV, and share price gains.
Johnson says that Caledonia’s approach of paying an inflation-busting dividend paid off over the five-year period.
He points out: “The fastest-growing dividend is Caledonia’s, which is thanks to both a focus on generating an ‘an annual dividend, which grows at or ahead of inflation over the long term’, as well as its habit of paying out a special dividend when it sells one of its unlisted holdings.”
In the case of Alliance Trust and F&C, Johnson says that both “have been able to provide peer-group leading five-year NAV returns, as well as having impressive dividend growth stories”.
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He added: “Both trusts have well-diversified portfolios of global equites and have outperformed the average dividend hero over the last five years, although neither beat the MSCI All Country World Index in our sample period.
“For investors concerned about security of income, both have been adept at managing their revenue reserves and both have permission to pay dividends out of capital, as well as substantial capital reserves to fall back on should this be required.”
In terms of the dividend heroes that fell behind inflation over the five-year period, the most notable trend is the underwhelming showing by UK equity income strategies.
Johnson says that while UK large-caps have seen an improvement in their performance over the past 12 months, investors may fall victim to the familiarity bias, forgetting that the UK has been one of the worst-performing developed markets over the past five years.
He points out that the UK market has been “mired by the spectre of Brexit, as well as prolonged periods of ultra-low interest rates, cheap oil, and resource prices”.
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