Ian Cowie: the trusts I own are still writing income cheques

by Ian Cowie from interactive investor |

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Despite the difficult dividend backdrop, during the third quarter of 2020 our columnist received trust dividends on time and to the right value.

Pensions freedom will imprison some folk in an impoverished old age when their investment income disappoints or disappears altogether. That’s a paradox so painful, a truth so inconvenient, that the financial services establishment would rather we did not discuss it at all - but wishing it would go away will not make it do so.

As reported last month, more than half the corporate constituents of the FTSE 100 index of Britain’s biggest shares have cut, cancelled or deferred dividend payments to shareholders since the coronavirus crisis began. No wonder a remarkable 80% of investors recently surveyed by Research in Finance (RIF), on behalf of the Association of Investment Companies (AIC), expressed some degree of concern about a cut in income caused by Covid-19.

But this DIY investor continues to believe pensions freedom is the biggest extension of consumer choice in living memory because it allows all of us to decide how we enjoy our life savings, instead of compelling us to buy an annuity, which provides a set level of income during retirement.   

Put another way, when we retire as butchers, bakers or candlestick-makers, we no longer need to retire as investors. Instead, thanks to the pension freedoms, we can continue to live off income and gains from our investment portfolios.

Now the AIC points out an important “peace of mind” characteristic in favour of investments trusts. Before you dismiss this concept as nebulous, bear in mind that insurance companies built a multi-billion pound industry out of many people’s desire for savings products that enable us to sleep at night.

The good news is that there is rising awareness of trusts’ ability to retain up to 15% of their income in good years to sustain dividend distributions to shareholders in bad years. For example, RIF’s survey found 21% of investment trust shareholders said they were not at all concerned about loss of income; that’s higher than the 11% of non-investment trust shareholders who shared that confidence.

Better still, where investors held more than half their portfolio in investment trust shares, the percentage of people who said they were not at all concerned about loss of income increased to 37%. Never mind the theory - or the percentages - how does it work in practice? My colleague, Richard Hunter, head of markets at interactive investor, reported this week that 2020’s third quarter reporting season is expected to show a sharp decline in corporate earnings, but this individual investment trust shareholder has a happier tale to tell.

During the third quarter of 2020, I received dividends on time and to the right value from the following investment trusts: Jupiter Emerging & Frontier Income (LSE:JEFI); Worldwide Healthcare (LSE:WWH); JPMorgan Japan Smaller Companies (LSE:JPS); International Biotechnology (LSE:IBT); Henderson Far East Income (LSE:HFEL); Ecofin Global Utilities & Infrastructure (LSE:EGL); BlackRock Latin American (LSE:BRLA); Aberdeen Standard European Logistics (LSE:ASLI); and Rights & Issues (LSE:RIII).

I have listed them in the chronological order in which dividends were received, but the important point is that this four-figure income was generated in just three months: July, August and September. As if to illustrate by contradistinction the value of investment trusts’ ability to sustain dividends despite difficult times,  September also saw Royal Dutch Shell (LSE:RDSB) cough up another reduced quarterly payment since the oil giant said it would cut its dividend earlier this year.

That was a terrible disappointment for many income-seekers, who regarded this FTSE 100 blue chip as such a safe bet, which led to the old stock-market saying “Never sell Shell”. 

Looking forward, there are likely to be more disappointments before the coronavirus goes away as mysteriously as it arrived.

Here and now, despite the new dangers created by pension reforms, I continue to believe the good that will arise from them will outweigh the bad for most of us. To return to the painful paradox with which this piece began, it seems to me that critics of pensions freedom are a bit like the wiseacres who warned that the Locomotives on Highways Act of 1896 would lead to an increase in road traffic accidents.

They were right on one level but wrong on another because very few drivers today would wish to restore the legal compulsion for a man with a red flag to walk in front of every car.

Ian Cowie is a shareholder in Aberdeen Standard Life European Income (ASLI); BlackRock Latin America (BRLA); Ecofin Global Utilities & Infrastructure (EGL); Henderson Far East Income (HFEL); International Biotechnology Trust (IBT); Jupiter Emerging & Frontiers Income (JEFI); JPMorgan Japan Smaller Companies (JPS); Rights & Issues (RIII); Worldwide Healthcare (WWH) as part of a diversified global portfolio.

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

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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