Funds that pay out a stable and growing income stream represent the holy grail for investors at a time when interest rates remain low.
The Association of Investment Companies (AIC) has shone the spotlight on 20 investment trusts that have achieved the rare feat of growing their dividends for 20 consecutive years or more. Half of the list claim an impressive track record of income growth for 40 years plus.
The AIC’s table, which is based on Morningstar data, highlights an array of talented fund managers that investors can access via investment trusts. Unlike their open-ended equivalents, investment trusts have the advantage of being able to smooth dividend payments by using revenue reserves.
“If you are looking for income heroes, then the investment trust world has been brilliant,” said Peter Lowman, chief investment officer of wealth management firm Investment Quorum.
“We are in a low interest rate, low inflation, low growth world but we have investment companies that have consistently grown their dividends for 20 years plus - in an environment where it has been virtually impossible to get any yield. This is incredibly attractive,” he added.
Picking Up Income on the Cheap
Investors can also potentially profit if they are able to buy in to a trust at an attractive entry point. For example, when it is trading at a discount to net asset value (NAV), which equates to the sum of the total underlying assets minus liabilities.
In the run-up and straight after the UK’s vote in favour of leaving the European Union, many investment trusts were trading on significant discounts, particularly those that held domestically-focused UK stocks.
“We were picking up some of our best buys at between 10-20% discounts to NAV. They have narrowed now, so we made good money there,” Lowman added.
Investment trusts also have the ability to use gearing, or leverage, which means they have the potential to enhance returns when the fund manager feels optimistic about the stock market.
“If investors can buy in at an attractive discount and the trust employs gearing in the right way, investment trusts can outstrip open-ended funds over time quite handsomely. However, there are times when gearing can work against them if markets have a shake-out, as losses can be amplified,” explained Ben Willis, head of research at Whitechurch Securities.
Top of the Charts
Three investment trusts sit at the top of the AIC’s list of dividend heroes, with 50 years of consecutive dividend increases. They are City of London, Bankers and Alliance Trust.
City of London
The £1.4 billion City of London (CTY) investment trust, which is Gold Rated, sits in the UK equity income sector and has a yield of 3.9%. It is managed by Job Curtis of Henderson Global Investors and currently trades at a 0.6% premium to NAV. Over the past five years, it has seen its share price rise by 71.4%. Its NAV has returned 74.2% over the same time period.
Nigel Moore, a senior wealth manager at Pilling & Co, highlights the trust’s significant revenue reserves, which stand at approximately 13.5 pence per share. He says this equates to 85% of the full-year dividend – if the reserves were needed.
“This will be advantageous to investors if corporate earnings decline and dividend income comes under pressure. Open-ended fund do not have this benefit. The trust can also utilise gearing and levies a low ongoing charges figure of 0.52%, which is significantly lower than many open-ended equivalent funds,” Moore explained.
The Bankers Trust
Managed by Henderson Global Investors’ head of global equities Alex Crooke, the £937.3 million trust sits in the global sector and yields 2.2%. It is currently on a discount to NAV of 4.4% and has seen its share price return an impressive 103.2% over five years. During the same period, its NAV has grown by 89.5%.
Morningstar analyst David Holder describes Crooke, who has run Bankers (BNKR) since 2003, as a “safe pair of hands”. He is particularly positive about the trust’s competitive charging structure.
“We like the simple and transparent nature of the fee structure, not least because it results in a very competitive ongoing charge of 0.52% with the tiered rate facilitating the passing on of economies of scale to investors as assets increase,” Holder noted.
Alliance Trust
Alliance Trust (ATST) has certainly been no stranger to headlines in recent years, as a result of its feud with activist hedge fund investor Elliott Advisors. This finally came to an end earlier this month after Elliott sold its stake back to Alliance Trust. Elliott said it had achieved its objective to improve Alliance’s investment performance.
From early April, the trust will move to a multi-manager approach that targets eight equity fund managers, overseen by Willis Towers Watson.
Morningstar analyst David Holder welcomes the board’s commitment to its long-term track record of dividend growth. However, he says the board may have missed an opportunity to review its dividend policy.
“Perhaps a more radical approach could have been to consider an enhanced distribution policy,” Holder added.
The £2.5 billion trust sits in the global sector and yields 1.9%. It is currently trading at a 5.2% discount to NAV, which represents an improvement from the autumn of last year when it was on a 10% discount. Its share price has risen by 107.8% over the past five years, while its NAV is up by 83.1%.
