Interactive Investor

Ian Cowie: trusts’ income edge paid dividends in 2020

23rd December 2020 10:16

Ian Cowie from interactive investor

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Investment trusts weathered the dividend storm, which translated into substantial cash inflows for our columnist’s ‘forever fund’. 

One good thing about bad times is they help investors reviewing their portfolio performance over the last year to sort the wheat from the chaff - and the winners from the losers. Better still, investment trusts’ structural advantages helped them sail through 2020’s coronavirus storm with flying colours and they now seem set to cope with the uncertainty of Brexit.

Most media coverage of stock-market shocks during the last year focused on share prices, or fluctuations in capital values. But many income-seeking investors - including those of us exercising newish pension freedoms - are equally interested in dividends and whether they are dependable or disappointing.

That’s where investment trusts showed their strength over all other forms of pooled funds and direct equity investment during the last year. More than half the corporate constituents of the FTSE 100 index of Britain’s biggest shares cut, cancelled or deferred their dividends during 2020.

Even some blue-chip equities, which had previously proved reliable, disappointed. For example, Royal Dutch Shell (LSE: RDSB) cut its payout for the first time since the Second World War.

By contrast, more than nine in 10 equity-based investment trusts maintained or increased their dividend distributions, despite the pandemic panic. Only 14 investment trusts, or 8% of the total, disappointed shareholders’ dividend expectations.

Coming down from the clouds, that translated into substantial cash inflows for my ‘forever fund’; the portfolio I hope will pay for my retirement. During the last quarter of 2020, I received dividends from a globally diversified range of investment trusts.

These included Aberdeen Standard European Logistics Income (LSE:ASLI), BlackRock Latin American (LSE: BRLA), Ecofin Global Utilities & Infrastructure (LSE: EGL), Henderson Far East Income (LSE: HFEL), JPMorgan Japan Small Cap Growth & Income (LSE: JSGI), Jupiter Emerging & Frontier Income (LSE: JEFI), Northern 2 Venture Capital Trust (LSE: NTV) and Northern 3 VCT (LSE: NTN).

Distribution yields - or dividends expressed as a percentage of share price - varied from high payouts, such as HFEL’s 7.1% and NTV’s 5.7% - with the latter being tax-free because it is a Venture Capital Trust (VCT) - to more modest payouts, such as JSGI’s 3.4% and EGL’s 3.7%. It is also notable that, despite dividend cuts elsewhere, HFEL actually increased its cash distribution by 2.7% during 2020 without needing to dip into reserves.

What it all added up to was a five-figure annualised income that I could live on if earned income and dividends from direct equity holdings disappoint.

Annabel Brodie-Smith, a director of the Association of Investment Companies (AIC), emphasised the importance of reliable income. She told me: “The vast majority of investment companies investing in equities have held or increased their dividends since the pandemic started. This is quite an achievement when you look at the number of trading companies slicing their dividends and the subsequent dividend drought.

“Many investment companies have made use of their revenue reserves, a unique income advantage over other types of fund. It enables them to squirrel away up to 15% of the income they receive each year, which means in these tough times they use the reserves to boost or sustain their dividends.”

However, it is important to beware that the price of a high income can be low total returns. None of my yielders delivered anything like the returns generated by three of my non-yielders or negligible yielders during 2020.

For example, Polar Capital Technology (LSE: PCT) led the pack with a total return of 42% over the year, following 262% over the last five years and 499% over the last decade. Such eye-stretching capital growth more than compensates for an absence of income.

Similarly, Baillie Gifford Shin Nippon (LSE: BGS) delivered no dividends but total returns of 41% over the year, 196% over the last five years and 723% over the last decade. Worldwide Healthcare (LSE: WWH) yields a negligible 0.7% but returned 19% over the year; 104% over five years; and 516% during the last decade.

All three low or no-yielders are among my top 10 most valuable holdings. Better still, none of them suffers high ongoing costs - even after any performance fees are included - with Morningstar calculating total charges at 0.73% for BGS, 0.88% for WPP and 0.99% for PCT.

Looking forward, I expect 2021 to extend or continue several trends seen in global markets during 2020 - such as the rise of renewable energy, with increased expenditure on healthcare and technology. Whatever the future holds, a diversified portfolio of investment trusts, seeking income and growth or a mixture of both, should give me exposure to wealth creation opportunities wherever they arise.

Ian Cowie holds shares in Aberdeen Standard European Logistics Income (ASLI); Baillie Gifford Shin Nippon (BGS);  BlackRock Latin American (BRLA); Ecofin Global Utilities & Infrastructure (EGL); Henderson Far East Income (HFEL); JPMorgan Japan Small Cap Growth & Income (JSGI); Jupiter Emerging & Frontier Income (JEFI); Northern 2 Venture Capital Trust (NTV); Northern 3 VCT (NTN); Polar Capital Technology (PCT); Royal Dutch Shell (RDSB) and Worldwide Healthcare (WWH) as part of a globally diversified portfolio of investment trusts and other equities.

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.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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