Interactive Investor

Ian Cowie: the investment trusts that pass the 9% inflation test

12th May 2022 07:41

Ian Cowie from interactive investor

Exclusive research names trusts with yields of 3% or more that over the past five years have delivered dividend increases ahead of the current rate of RPI inflation.

Just over a dozen investment trusts have ‘done the double’ for income-seeking investors, like me, by delivering inflation-busting dividend growth of at least 9% over the past five years and continue to yield 3% or more for buyers today. That’s the surprising and encouraging headline news from new research, conducted exclusively for interactive investor readers.

Inflation is the insidious enemy of savers and investors because it means we get paid for our prudence with money that has less purchasing power than the cash we set aside. It’s worst for people who have finished full-time work and must rely on their pension income because they cannot do overtime or seek a pay rise to make good the damage done by politicians debauching the currency.

Last week, Andrew Bailey, governor of the Bank of England, switched abruptly from insisting Britain’s inflation problem was “transitory” to admitting he expects it to hit 10% before the end of this year. Next week, the Office for National Statistics (ONS) will update its Consumer Prices Index (CPI) and Retail Prices Index (RPI) to give official - and unofficial - snapshots of what is now widely recognised as a cost of living crisis.

On a brighter note, here are some practical solutions to that serious problem.  The Association of Investment Companies (AIC) has interrogated data from independent statisticians Morningstar to identify investment trusts that have raised dividends by 9% (the current annual rate of increase in inflation, as measured by the RPI, which is higher than CPI) or more and still pay buyers today a reasonable income of 3% or more.

Step forward, JPMorgan Asia Growth & Income (LSE:JAGI), which achieved the highest sustained dividend increases of 45% per annum over the last five years and still yields 5.4%. For those who fear the price of a high income today is low returns tomorrow, JAGI also achieved total returns of 38% over the last five years. Less happily, at least for those of us who care about one million people in forced labour camps and other human rights abuses in China, that country accounts for 31% of underlying assets, which may also explain why the share price has shrunk by 27% over the last year.

Manchester & London (LSE:MNL) in the AIC ‘Global’ sector, ranks second overall with annualised dividend increases of 44% and a current yield of 3.6%. This tiddler, with assets of £148 million, may be under the radar of many folk but might be worth a closer look, if only to see how it generates decent income from a technology-focused portfolio, led by Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) - with non-yielding investment trusts, including Polar Capital Technology (LSE:PCT) - also in its top 10 underlying assets. Less happily, MNL’s total returns over the last five years were only 17%, and it shrank by 35% over the last year.

Lindsell Train (LSE:LTI), also in the global sector, ranks third with annualised pay rises for shareholders of 42% over the last five years and a current yield of 4.4%. Against that, its top holding is Lindsell Train Ltd - at 43% of all assets - which might be regarded as a bit of a 'black box’ concentration of risk. However, LTI trades at a premium to net asset value of 6%, so plenty of people seem willing to take that leap in the dark.

Ecofin Global Utilities & Infrastructure (LSE:EGL) came fourth with annualised increased income of 33% and a current yield of 3.3%. Its underlying assets are led by NextEra Energy (NYSE:NEE), probably the biggest renewable energy business in the world, followed by more conventional utilities including Iberdrola (XMAD:IBE) and SSE (LSE:SSE). This portfolio generated total returns of 122% over the last five years and 21% over the last year but the shares continue to trade at or near NAV. Full disclosure: I first invested in EGL in September 2019, paying 152p for shares that cost 217p this week.

JPMorgan Russian Securities (LSE:JRS) would rank fifth in this analysis at first sight. But, although they kindly took me to Moscow during the go-go 1990s, when the nightlife had to be seen to be believed, I am ignoring it. This is partly for moral reasons - there is a war on, after all - and also for practical considerations, including the strong possibility that its apparent 61% dividend yield today will never actually get paid.

So Invesco Asia (LSE:IAT) stands fifth among these fabulous inflation-busters with annualised dividend increases of 29% and a current yield of 4.7%. Closer to home, Montanaro UK Smaller Companies (LSE:MTU) is not far behind with annualised payout hikes of 25% and an attractive yield today of 5.9%.

Annabel Brodie-Smith, a director of the AIC, told me: “It’s been a tough year for income investors with inflation raging and the terrible war in Ukraine contributing to rising energy and food prices.

“Investment companies have important features which can help protect investors from spiralling prices. Investment companies have a strong track-record of delivering income because they can hold back some of the income they receive from their investee companies and use this to boost dividends when times are tough.

“This worked particularly well for investors during the coronavirus pandemic’s dividend drought in 2020, when 85% of income-paying investment companies raised or maintained their dividends.”

By contrast, no fewer than 52 of the FTSE 100 index of Britain’s biggest businesses cut or cancelled shareholders’ income that year. This makes the sustained dividend increases delivered by these inflation-busting investment trusts all the more remarkable - and valuable to people, like me, who intend to rely on them for income in retirement. You can see the full list in the table below.

Company name AIC sector Management group Yield (%) Five-year dividend growth (%)
JPMorgan Asia Growth & Income (LSE:JAGI) Asia Pacific Equity Income JP Morgan Asset Management 5.42 45.11
Manchester & London (LSE:MNL) Global M&L Capital Management 3.59 44.14
Lindsell Train (LSE:LTI) Global Lindsell Train 4.42 42.18
Ecofin Global Utilities & Infrastructure (LSE:EGL) Infrastructure Securities Ecofin Advisors 3.35 32.77
Invesco Asia (LSE:IAT) Asia Pacific Equity Income Invesco Asset Management 4.72 28.90
Montanaro UK Smaller Companies (LSE:MTU) UK Smaller Companies Montanaro Investment Managers 5.88 25.12
JPMorgan Global Growth & Income (LSE:JGGI) Global Equity Income JP Morgan Asset Management 3.77 20.77
abrdn Private Equity Opportunities (LSE:APEO) Private Equity abrdn 3.03 20.29
Templeton Emerging Markets (LSE:TEM) Global Emerging Markets Franklin Templeton Investments 4.05 18.16
3i (LSE:III) Private Equity 3i Group 3.05 11.84
Law Debenture Corporation (LSE:LWDB) UK Equity Income Law Debenture Corporation 3.70 11.67
BlackRock Sustainable American Income (LSE:BRSA) North America BlackRock Investment Management 3.81 11.22
TR Property (LSE:TRY) Property Securities BMO Global Asset Management 3.45 11.20
BMO Private Equity Trust (LSE:BPET) Private Equity BMO Global Asset Management 4.93 9.72

Source: AIC/Morningstar. Data as at 6 May 2022. Past performance is not a guide to future performance. 

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

Ian Cowie is an investor in Ecofin Global Utilities & Infrastructure (EGL) and Polar Capital Technology (PCT) as part of a diversified portfolio of investment trusts and other shares.

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.

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