Ian Cowie: six of the best trusts for sustainable income

Our columnist reveals the top performers for paying shareholders reliable income over the last five years.

New research exclusively commissioned for interactive investor shows six sectors around the world where shareholders’ income has risen most during the last five years.

Only investment trusts which sustained shareholders’ income throughout that period were considered - and that success is all the more remarkable because of widespread failure to do so elsewhere.

Double-digit annual average dividend growth was delivered by six overseas markets, despite the coronavirus crisis causing 52 of the FTSE 100 index companies to cut payouts during the pandemic. 

This global analysis by the Association of Investment Companies (AIC) is of vital importance to anyone aiming to pay for retirement with shares, where dividends can be cancelled without notice. More positively, a track record of sustained and rising payouts may provide some comfort - in the form of a rational basis on which to attempt to forecast the future - although it is important to understand that there are no guarantees.

Any fool seeking equity income can buy a high dividend yield today at the price of poor returns or even capital losses tomorrow. So it is important to consider risks - including ethical issues - when planning for the decades after work.

That’s why I sold out from what turned out to be the AIC’s top performer for paying shareholders sustained income over the last five years; its ‘China and Greater China’ sector, where dividends soared by 29% over that period.

As explained here last year and, more recently last January, I have been investing in China since 1996, but recent revelations about what US president Joe Biden calls “genocide” made me change my mind. Hong Kong’s Hang Seng index has lost nearly a fifth of its value since February, so it looks like I am not the only one to have doubts about China, where a meagre running yield of just under 1.8% is another reason for investors today to be cautious.

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In the short term, my decision to sell Fidelity China Special Situations (LSE:FCSS) at 227p last April remains out of the money, with the shares trading at 342p this week. But at least I don’t need to worry about finding blood on my banknotes. FCSS fell 4.6% on Tuesday and I believe it has further to go. Here and now, the top yielder in this sector is JPMorgan China Growth & Income (LSE:JCGI), which yields 3.9%.

More positively, second place in this global survey of where investors’ income has risen most is held by the AIC’s highly diverse ‘Country Specialist’ sector, which is still yielding an average of 2.85% after increasing dividends by an annual average of more than 17% during the last five years. The top yielder in this AIC group is JPMorgan Russian Securities (LSE:JRS)yielding 4.7%.

Sad to say, my main exposure to this sector, Vietnam Enterprise Investments (LSE:VEIL), pays no dividends at all - although the share price has soared from the 404p I paid in July, 2018, to 657p this week. VEIL has shrugged off the share price carnage in China so far and demonstrates the value of a diversified portfolio.

The third-best place to find rising dividends during the last five years was ‘Asia Pacific Equity Income’, where shareholders’ payouts surged by an annual average of more than 15% and still yield a mouth-watering 4.6%. The top yielder in this sector is Henderson Far East Income (LSE:HFEL), which pays 7.3% income but raised payouts by only 3.7% over the period.

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Investors willing to accept a lower initial income from comparable funds received bigger pay rises. For example, Invesco Asia (LSE:IAT) yields 4.1% but raised payouts by an annual average of an eye-stretching 33% and Schroder Oriental Income (LSE:SOI) (SOI) yields 3.8% and achieved annual rises of 5.2%.

Most surprisingly, the AIC’s ‘Japan’ sector came fourth in this global survey with annual average dividend growth of 15.2%, albeit with a meagre running yield of just over 1%. CC Japan Income & Growth (LSE:CCJI) is the top yielder in Tokyo with 3.4% but has no five-year track record of sustained payouts.

By contrast, Aberdeen Japan (LSE:AJIT) yields 2.1% and raised payouts by an annual average of 29% during the period. My yielder in the Land of the Rising Sun is JPMorgan Japan Small Cap Growth & Income (LSE:JSGI), which pays 4.4% but has no five-year record of rises.

Ranking fifth, ‘European Smaller Companies’ was another sector that smashed stereotypes by delivering a dividend yield of 2.2% after rising by an annual average of 14.9%.

‘Global Emerging Markets’ stands sixth, showing these trusts are no longer just about growth by raising dividends by an annual average of 14.4% to currently yield 2.3%. My yielder here is Jupiter Emerging & Frontier Income (LSE:JEFI), which pays 3.8% but has no five-year record.

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Annabel Brodie-Smith, communications director of the AIC, said: “With more people relying on their investments to fund their retirement, investment companies have a unique range of tools to help deliver high and rising levels of income. 

“Crucially, 85% of equity income-paying investment companies increased or maintained their dividends to shareholders last year despite the dividend drought of the pandemic.

“While dividends are never guaranteed, investment companies have been able to increase payouts by more than inflation over time, with the average investment company growing dividends by 6.3% a year over the past five years.”

Closer to home, the AIC’s ‘UK All Companies’ sector yields 2.2% but delivered increases of 6.2% during the period. Similarly, that stalwart of British yield-seekers, ‘UK Equity Income’ pays out 3.8% but grew by only 4.1%.

So it seems that, contrary to stereotypes about Britain being best for yield, it may pay to consider international opportunities when investing for sustainable and rising income.

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

Ian Cowie is a shareholder in Henderson Far East Income (HEFL); JPMorgan Japan Small Cap Growth & Income (JSGI); Jupiter Emerging & Frontier Income (JEFI); and Vietnam Enterprise Investments (VEIL) as part of a global portfolio of investment trusts and other shares.