How to Sustain a High Level of Income

VIDEO: Merchants Trust fund manager Simon Gergel on the effect of the proposed gas price freeze on utility stocks and how he has grown the trust's dividend for nearly 30 years

Emma Wall 1 October, 2013 | 7:00AM
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Emma Wall: Hello and welcome to the Morningstar series, Why Should I Invest With You? I'm Emma Wall and here with me today is Simon Gergel of the Merchants Trust. 

Hello, Simon. 

Simon Gergel:  Thank you very much. It's lovely to be here. Thank you. 

Wall: So, you have quite a high yield compared to some of your competitors. I know last year you were using reserves to cover that yield. Is that still the case? 

Gergel: Well, in the last year I think we covered 99% of the dividend from earnings, so we dipped into reserves to a very small extent. I think going forward we're looking at differences still on improving trends, so we are very confident that at some point we will be covering the dividend. 

Wall: That's something that’s unique to investment trusts, isn’t it? 

Gergel: Yes. We've been able to dip into reserves; you can put all the reserves away in the good times to pay out dividends in the tougher times and we've been through exceptionally tough times since 2009, where dividends fell very heavily. They’re now starting to recover very nicely. 

Wall: Is that a burden then having such a high yield, because it is more than your competitors are paying? 

Gergel: Yes, the trust yields are the highest in the sector and considerably more than the market. I don't think it's a burden at all. Actually buying high yielding companies historically has been a very good thing to do; high yielding companies tend on average to outperform over the long term, and there is a lot of evidence for that. 

We then feel constrained by the type of – by the yield we're generating. We always buy a company when we're looking – when we buy a company, we are looking for the total return we can get. So, we're looking at the capital growth as well as the dividend, and we're confident we can buy sufficient companies with good prospects for capital return as well as a good yield. So, no, we don’t feel constrained by it. 

Wall: So you’re never prioritizing yield over the capital then? 

Gergel: No, we're always looking for total return we can get when we buy a company. We always want a certain amount of dividend when we buy it, but we're not prioritizing that. 

Wall: Looking then at the portfolio, you own quite a lot of utility stocks. This is pretty topical, because Ed Miliband’s come out this week and said that he may, if he gets into power, freeze energy prices. Does that impact how you're looking at the fund? 

 Gergel: Well, I think when you invest in utilities, you always have to be aware of both the political risk factors and regulatory risk factors, and these come and go from time to time. These specific policies, we’ll have to see how they develop. They don't seem to be that clearly developed, may I say. It could be that by the time we get there, actually these are quite difficult – it would be quite difficult to put a freeze into action because of European Union rules. It would be very hard to understand how that would affect investment by the companies. 

U.K. needs a massive investment in energy infrastructure, in generating capacity, potentially nuclear energy, and companies are going to be very reluctant to invest with the prospect of price controls or tighter regulation. So, I think in the end we may see a very different outcome to one that’s been proposed. In the meantime, of course, share prices have already reacted and fallen, and that might be an opportunity at some point. 

Wall: So watch this space? 

Gergel: Absolutely. 

Wall: Simon, thank you very much. 

Gergel: Thank you. 

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Merchants Trust Ord558.00 GBX1.27Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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