Ian Cowie: the tactic enhancing my investment trust dividends

Smoothed and sustained dividend income has always been an important advantage of investment trusts over all other forms of pooled funds.

Now even emerging market shares that used to rely solely on hopes of capital growth are proposing to pay us to be patient.

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Like many investors who have been in the stock market for a few decades, I have several 10-baggers, or shares whose price soared by 10 times or more, under my belt.

But, with rising anxiety about technology valuations in general and artificial intelligence (AI) in particular - amply reflected by this week’s market jitters - I do worry about go-go growth stocks, promising jam tomorrow.

So, with new money, I tend to favour those that pay income today. That way, those of us with one eye on funding retirement with our investments, might have something to keep us warm when cold winds blow and share prices plunge. Or when the geopolitical situation intensifies further.

Non-yielders offer no such comfort in times of rising uncertainty.

More positively, sometimes shareholders can do the double with income and growth. Step forward, JPMorgan India Growth & Income plc (LSE:JIGI), which paid its first dividend last December, after changing its strategy to include income distributions equal to 4% of its net asset value (NAV) funded from some of its capital growth.

Investment trusts, unlike unit trusts or exchange-traded funds (ETFs), can retain up to 15% of total returns in good years to sustain dividend distributions in bad years.

This apparently technical feature has enabled no fewer than 20 investment trusts to increase shareholders’ income every year for at least 20 years - and half these “dividend heroes” have done so for more than half a century.

Critics fret that this might entail reducing total returns. Only time will tell but this long-term holder cannot resist pointing out that I paid 63p per share in June 1996 for what was then called Fleming Indian and, having hit £11 last year, traded as JIGI at £8.61 today (Thursday).

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Now its smaller and medium-sized companies rival on the subcontinent is following suit. India Capital Growth Ord (LSE:IGC) is proposing to pay dividends equal to 2% of its NAV, with an extraordinary general meeting (EGM) next Wednesday, 25 March.

However, it is important to beware that investment platforms may impose earlier deadlines for votes to be received, so it makes sense for shareholders to consider action without delay. I have just voted in favour of the enhanced dividend online - so no paperwork, like the old days - and it took two minutes.

Some may say a 2% yield is nothing to get excited about, but others might argue that it is a modest start with hopes of more to come. Regular readers will not be surprised to learn that this professional optimist takes the latter view.

More specifically, enhanced dividends are a shrewd response to rising investor demand for income from Boomers, like me, who might be considering the relative advantages of spending less time filling in quarterly tax returns and more time on the boat.

No, I’m not looking for your sympathy; you can get plenty of false modesty from callow commentators who don’t own any shares.

Back to business, investors who understand that the first step towards making a profit is often - but not always - to buy low, will note that India is currently under a bit of a cloud, with burning oil tankers in the Strait of Hormuz adding to its woes.

So, India, which needs to import 85% of its oil, did well to negotiate the safe passage of several tankers through the Strait last week.

Closer to home, it’s also encouraging to see that all four of IGC’s directors, led by the impressive chair Elizabeth Scott, own more shares in this trust than they are paid in annual fees to sit on its board. Two out of four directors at JIGI can boast similar “skin in the game”.

But it’s been a bumpy ride recently for shareholders with total returns from IGC of 152%, 49% and minus 5.6% over the last decade, five years and one-year periods respectively.

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Meanwhile, JIGI delivered 84%, 23% and minus 7.1% over 10, five and one-year time frames.

No wonder IGC shares are priced 13% below their NAV, while JIGI trades around 10% below NAV. Those discounts might look like bargains if the world’s biggest democracy and fourth-largest economy, according to the International Monetary Fund (IMF), returns to favour.

Emerging markets are highly volatile, which is a euphemism for the pain or pleasure entailed when share prices plunge or soar.

So, funds like IGC and JIGI are totally unsuitable for anyone who is going to lose sleep after a bad day in the markets. Bear in mind, after the recent bad run, there might be worse to come.

On a brighter note, these funds’ newish trend towards paying income might help investors take a long-term view of short-term rough and tumble. To paraphrase David Bowie, they might even become dividend heroes one day.

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

Ian Cowie is a shareholder in India Capital Growth (IGC) and JPMorgan India Growth and Income (JIGI) as part of a globally diversified portfolio of investment trusts and other shares.