Ian Cowie: decent dividends more important to me than capital growth

What you see depends on where you are standing, which is why this 65-year-old investor views the stock market’s risks and rewards very differently from how I did as a beginner more than a quarter of a century ago. For example, dreams of capital growth are less important to me now than decent dividend income that turns up on time and keeps coming.

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This week, the Association of Investment Companies (AIC) updated its list of investment trusts which have sustained rising shareholders’ income for more than a decade but less than 20 years. In total, eight names were added to its “Next Generation of Dividend Heroes”, and I was pleased to see that I own shares in two of them. However, it’s only fair to say that my satisfaction was somewhat soured by both trusts’ awkward reminders that the price of a high income today can be low or no capital growth tomorrow.

Step forward, Canadian General Investments Ord (TSE:CGI), which has increased dividends for a decade without fail, and currently yields a modest 2.7% after notching up average annual increases of nearly 4.8% over the last five years. Despite that - and a punchy portfolio with prospects for capital growth, led by the artificial intelligence (AI) semiconductor hot stock, NVIDIA Corp (NASDAQ:NVDA) - shares in this £830 million trust continue to trade at an eye-stretching 42% discount to their net asset value (NAV).

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Evidently, Mr Market is not as keen as I am about CGI’s rising income or its other top 10 holdings, which include Canadian Pacific Kansas City Ltd (TSE:CP) railroad, the technology giant Apple Inc (NASDAQ:AAPL) and West Fraser Timber Co.Ltd (TSE:WFG). Nor do many investors seem to share my enthusiasm for a fund that was founded in 1930 and so survived the Great Depression and both world wars.

The explanation seems to be controlling stakes by two Canadian families and worries this might not maximise returns for other minority shareholders. Some critics claim the Canadians are too relaxed about CGI’s massive discount but, to be fair, they recently joined the AIC in a bid to increase awareness of this fund.

Here and now, total returns over the last year, five years and 10-year periods are 11%, 68% and 176% respectively. These rank CGI fourth out of six shares in the AIC’s “North America” sector, then third over five years, then second over the last decade.

At first glance, that does not seem too bad for a fund of this type. But matters are complicated by the fact that Canadian withholding taxes are not as easy to avoid as those in America, where five minutes’ filling in form W-8BEN effectively renders US equity income tax-free.

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Having corresponded with CGI’s board of directors and others about withholding taxes, I began to feel the will to live ebbing away but I intend to hang on until I can think of a better idea. So, having paid £24.39 per CGI share in November 2021, I am less than chuffed to see them trading at £21.60 this week.

Closer to home, Greencoat UK Wind (LSE:UKW) is another new entrant to the Next Generation of Dividend Heroes, having raised payouts for a decade. This self-descriptive renewable energy giant with more than £4.8 billion of assets is currently yielding an impressive 7.3% dividend income after raising payouts by an annual average of 8.1% over the last five years. If that rate of ascent was maintained, which is not guaranteed, it would double shareholders’ income in nine years.

Less happily, looking backwards, UKW’s total “returns” were -6.5% over the last year, 32% over five years and 130% over the decade. To be fair, those returns ranked it second over one year among 22 funds in the AIC’s “Renewable Energy Infrastructure” sector. While it topped the sector charts over both the longer periods.

Nor can I blame UKW for the idiotic windfall tax imposed on North Sea energy companies by a Conservative government that seems to have forgotten all that boring stuff about reducing taxes to let employers and employees keep more of what we earn. Eye-roll, sigh, clasps forehead and groans.

I bought Greencoat UK wind last summer at 145p. The current share price is 137p.

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On a brighter note, the other new entrants to the AIC’s hall of fame are CT UK High Income Ord (LSE:CHI) trust, Mercantile Ord (LSE:MRC), ICG Enterprise Trust Ord (LSE:ICGT), Henderson International Income Ord (LSE:HINT), RIT Capital Partners Ord (LSE:RCP) and BBGI Global Infrastructure Ord (LSE:BBGI). Current dividend yields of 7.4% at ICGT and 7.1% at HINT are notable, as are annualised rates of increase of 6.7% at HINT and 6.6% at CHIB.

Annabel Brodie-Smith, a director of the AIC, pointed out: “Investment trusts’ ability to smooth dividends over time makes them particularly attractive to income-seekers. They can do this because they are allowed to hold back up to 15% of their income each year, which they can use to boost payouts in leaner years.

“The eight trusts joining our ‘Next Generation of Dividend Heroes’ this year are from a range of sectors, from the UK to global shares. Their ability to keep growing their dividends through challenging times is reassuring.”

Of course, the past is not necessarily a guide to the future. But it does provide one factual basis on which to hazard a guess and might help those of us aiming to fund retirement from investment income, while keeping one eye on total returns.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Apple (AAPL), Canadian General Investments (CGI) and Greencoat UK Wind (UKW) as part of a global portfolio of investment trusts and other shares.