Interactive Investor

Delving into the dividend: nine income trusts delivering top total returns

19th April 2023 12:39

by Kyle Caldwell from interactive investor

Share on

There are sound reasons to look beyond ‘dividend hero’ investment trusts, as this research shows. 

Number nine 600

Many investors like to buy funds and investment trusts that invest in dividend-paying companies or income-producing bonds.

They appeal to all ages; those at retirement can use the dividends to help fund their lifestyle, while those who are younger can take advantage of compounding by reinvesting dividends.

There are plenty of funds investing in different regions and asset classes to cater for the high demand for income.

  • Invest with ii: Buy Investment Trusts | Top UK Shares | Open a Trading Account

Some funds aim to deliver a high level of income by structuring the portfolio to have a dividend yield that’s more than the market it is investing in. However, the risk is that sustaining a high dividend yield can come at the cost of total returns being less impressive.

Funds that have lower yields tend to mix and match more between growth and income. However, the obvious trade-off here for investors is accepting a lower income.

Investment trusts are more consistent dividend payers

As well as getting to grips with the income approach, investors also need to size up funds versus investment trusts. For investors looking for consistent growth in dividends, the latter is the better structure. This is owing to investment companies’ ability to hold back up to 15% of the income they receive each year in a revenue reserve. This gives them an advantage in delivering income to investors during lean periods.

This structure came into its own during the global financial crisis and 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.

There are 18 ‘dividend hero’ investment trusts that have increased their dividends for more than 20 years. Waiting in the wings for dividend hero status are 27 trusts that have increased dividends for 10 or more consecutive years, but fewer than 20.

In many cases, the dividend heroes and next generation dividend heroes are excellent options for investors. Moreover, for many investors, particularly those at retirement, the consistency of a rising dividend is to be treasured.

Investors should look beyond the dividend heroes

However, investors should not just simply stick to the investment trusts that have 10 years or more of consecutive dividend increases. In some cases, the total returns have disappointed, while in other 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.

By casting nets wider investors can find other income funds with superior performances in terms of total returns, as new research by QuotedData shows.

Andrew Courtney, analyst at QuotedData, screened for investment trusts with a 12-month trailing dividend yield of at least 2.5%. An income growth filter was then applied, which stripped out investment trusts that had failed to increase income returns ahead of the risk-free rate (10-year gilt yield) over the past 10 years. The final criterion – which proved a big hurdle for most income-paying trusts – was to outperform the MSCI All Country World Index over both the last five and 10 years on an annualised total return basis.

Monthly income calendar with calculator 600

Just nine investment trusts pass all the tests

Once all those filters were applied, just nine investment trusts remained. One is a dividend hero – Caledonia Investments (LSE:CLDN) – having raised payouts for 55 consecutive years, while Invesco Select Global Equity Income (LSE:IVPG) and CT Private Equity Trust (LSE:CTPE) feature on the next generation dividend hero list, with income increases in the past 12 and 10 years.

However, the other six trusts, BlackRock Sustainable American Income (LSE:BRSA), NB Private Equity Partners (LSE:NBPE), JPMorgan Global Growth & Income (LSE:JGGI), Henderson European Focus Trust (LSE:HEFT), 3i Infrastructure (LSE:3IN), and Gulf Investment Fund (LSE:GIF), have not achieved 10 years of consistent dividend increases. 

Courtney points out that while consistent dividends are highly prized by investors, the proof in the pudding is in the overall total returns.

Moreover, if a dividend is cut to put future dividends on a more sustainable footing, then this can be beneficial to shareholders over the long term. 

He said: “Reliable income is certainly an important factor for many investors, however, over the long term achieving positive total returns ahead of benchmark should be the standard on which investment trust are measured. Each of the nine companies mentioned above have managed to achieve this.” 

It may come as a surprise to readers, but not a single UK equity income trust passed all the performance filters.

The investment trusts with top total returns  

Investment trustAssociation of Investment Companies (AIC) sector12-month yield (%) 10-year (%) return (annualised)5-year (%) return (annualised)
BlackRock Sustainable American Income (LSE:BRSA)North America3.7910.929.43
NB Private Equity Partners (LSE:NBPE)Private Equity3.4615.1716.49
CT Private Equity Trust (LSE:CTPE)Private Equity3.4915.1519.16
Caledonia Investments (LSE:CLDN)Flexible Investment4.8610.9810.92
Invesco Select Global Equity Income (LSE:IVPG)Global Equity Income2.6410.868.81
JPMorgan Global Growth & Income (LSE:JGGI)Global Equity Income3.7612.5811.21
Henderson European Focus Trust (LSE:HEFT)Europe2.6911.028.99
3i Infrastructure (LSE:3IN)Infrastructure3.3714.1112.19
Gulf Investment Fund (LSE:GIF)Global Emerging Markets3.6211.6718.1
MSCI All Country World Index (USD)10.48.59

Big discounts, despite long-term outperformance

Courtney says there are some big discounts, despite trusts having a strong performance track record and paying income.

Caledonia Investments, for example, is trading on a 29% discount to its net asset value (NAV).

In addition, the two private equity trusts in the table, are on big discounts of 37.3% and 32.3%, respectively, for NB Private Equity and CT Private Equity.

A tightening in monetary policy has been an unfavourable backdrop for trusts investing in unlisted companies. There are concerns among investors that falls in listed markets are putting downward pressure on valuations for unlisted companies. 

Courtney says two standout investment trusts outside the dividend hero and next generation lists are JP Morgan Global Growth and Gulf Investment Fund. 

“JP Morgan Global Growth Income is a very well managed and popular global equity fund offering a solid yield (based on distributing a percentage of its NAV, so some of the return may come from capital).

“Gulf Investment Fund has offered impressive annualised returns well above benchmark. The company has been particularly strong over the past five years, benefiting from the strength of the region’s economies, which have been boosted by higher energy prices.”

Courtney adds that most renewable energy funds were unable to make the screen with the oldest only 10 years old. However, he points out that performance in the sector has been impressive.  

He says: “Bluefield Solar Income Fund (LSE:BSIF) stands out, with management guiding the fund successfully through the early development of the sector. A yield of almost 6% and annualised returns of 12% over the past five years are a clear reflection of this. Greencoat UK Wind (LSE:UKW), NextEnergy Solar (LSE:NESF) and JLEN Environmental Assets Group (LSE:JLEN) are other companies which have performed strongly.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Get more news and expert articles direct to your inbox