Why I voted against Scottish Mortgage’s dividend payment

One of the special features of investment trusts compared with funds is that you become a shareholder in trusts, which gives you the opportunity to have your say.

Investment trusts also differ from funds by having an independent board of directors. It is the board’s job to exercise independent oversight, hold managers to account (including the ability to make changes if performance disappoints) and look after the interests of shareholders (such as by driving down costs).  

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Having an independent board of directors doesn’t guarantee success or mean that the investment trust sector is immune to persistently poor performance, or indeed the odd failure, but independent oversight arguably means an investment trust is managed to a higher standard.

In my own stocks and shares ISA, I’ve held both funds and investment trusts over the years, with some managed by professional investors and others index funds or exchange-traded funds (ETFs) that track the up and down fortunes of a particular market.

Scottish Mortgage (LSE:SMT) was a longstanding holding of mine from early in 2013 to the summer of 2023. From late 2021, a series of sharp interest rate rises would impact Scottish Mortgage’s high-octane growth style. However, this is not the reason I sold, instead it was due to needing the cash and on a long-term view it was a holding that served me very well, despite the last 18 months or so being a less fruitful period. 

Recently, I started rebuilding my stocks and shares ISA. While I was afforded a blank sheet of paper, I couldn’t resist returning to an old favourite that had served me well. I’m now focusing on investing with a 25-year view, which will hopefully fund an early(ish) retirement, and I’m happy to dial up risk and focus solely on funds and investment trusts that buy shares.

In my opinion, Baillie Gifford-managed Scottish Mortgage stands out in a big crowd due to its uncompromising drive to find the world’s most exceptional growth companies. While longstanding fund manager James Anderson retired in April 2022, the succession planning was smooth as lead manager Tom Slater had been joint manager since 2015. Slater is supported by Lawrence Burns, who was appointed deputy manager in 2021, having worked at Baillie Gifford since 2009.

As a shareholder again in Scottish Mortgage I was able to participate in the annual general meeting that took place at the end of the last week. There were 15 resolutions to mull over, which were all standard items that crop up at most investment trust AGMs. These included having a say on electing and re-electing board members and auditors, approving the report, accounts, remuneration report, and remuneration policy, as well as authorising share buybacks, which attempt to keep a lid on an investment trust’s discount. 

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Another voting item that often crops up is approving a final dividend, which shareholders have become accustomed to over the years despite Scottish Mortgage’s growth focus. The trust has a formidable record on this front, having increased dividends for 42 consecutive years.

The dividend is modest, with a current dividend yield of 0.4%. The dividend increase of 3.3% to 4.38 pence per share (2024 - 4.24 pence per share) sailed through, with 99.9% of shareholders who voted giving their approval.

I was in a minority who voted against the dividend increase.

One of the reasons is due to my own investment objectives. I’m at a stage in my investment journey where I want my investments to maximise growth.

Another reason is because Scottish Mortgage’s investment portfolio mainly backs companies – both public and private – that don’t pay dividends. Instead, its holdings tend to reinvest earnings to maximise growth opportunities.

In its latest annual results (to the end of March 2025), it said the rising dividend was recommended despite a fall in earnings, mainly due to a write-off of income from a big stake in car battery start-up Northvolt, an unlisted company that filed for bankruptcy.

The trust said: “Although income from the equity portfolio was similar to the previous year, overall revenue earnings per share fell by 40% mainly due to the write-off of income accrued from the Northvolt promissory note.”

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Scottish Mortgage had to dip into its capital reserves and revenue reserves to fund the dividend. The revenue reserve – retained income revenue to pay out as income – has almost been exhausted, falling from £16 million to £3 million.

If the revenue reserve is exhausted, and not enough income is generated from the portfolio’s investments, Scottish Mortgage will have only capital reserves at its disposal to maintain its dividend track record. Capital reserves allow investment trusts to fund part of their dividend distributions from capital profits.

Personally, I’d sooner Scottish Mortgage avoid chipping away at capital to satisfy those shareholders who would like a small, but rising, dividend. I’m investing for its capital growth rather than income potential.

While its dividend track record is very impressive, I wouldn’t like to see it maintained simply so the trust can tick the box of continuing to grow dividends – especially if it’s being funded through capital profits.

Scottish Mortgage explains that its distributable capital reserve mainly consists of profits it has made. However, I’d sooner see those gains paid straight away as part of the net asset value (NAV) rather than held back and paid out as income.

In its latest financial results, Scottish Mortgage outlined its dividend stance, saying: “The board recognises the importance to some shareholders of a predictable and growing dividend. The company is an ‘AIC Dividend Hero’ having increased its dividend for 42 consecutive years. The board plans to continue this trend.”