With UK interest rates at their lowest level in living memory, and zero-interest rates looking like a possibility, income seekers are finding the climate increasingly challenging. Alan Brierley, head of investment companies research at Collins Stewart, says: "We expect the search for income, or more importantly, sustainable income to be a key investment theme this year. With interest rates heading to zero as the authorities adopt increasingly aggressive actions to prevent a stagdeflationary cycle, savings rates are collapsing. Meanwhile, within the equity market, dividend cuts will be made across the market, while the biggest source of income, the banking sector, has imploded."
With this in mind, the Association of Investment Companies has identified the investment trusts with unblemished records of annual dividend increases.
City of London Investment Trust has an outstanding 42-year record of annual dividend increases, closely followed by Alliance Trust, Bankers Investment Trust and Caledonia Investments who all have 41-year records of consecutive annual dividend increases.
Annabel Brodie-Smith, communications director at the Association of Investment Companies, says: "The investment company sector has an enviable track record of dividend increases and this is particularly relevant at a time when interest rates are falling and yield is much harder to come by.
"This is because investment companies can retain some of the income they receive each year and transfer this to revenue reserves. This can be contrasted with most open-ended funds, which are required to distribute all their income each year.
"These revenue reserves can be built up in good years and used to boost dividends to shareholders in difficult years. This is known as 'smoothing dividends', and is an advantage of the investment company structure."
TOP SECTORS FOR DIVIDENDS
Of all the 159 conventional investment companies with 10-year or longer-track records, one in five have increased their dividends for each of the last 10 years. Of all the 78 conventional investment companies with 20-year track records, nearly one in four (24 per cent) has increased their dividends in every single year of the last two decades.
Particularly strong dividend performance is found in the AIC's Global Growth and UK Growth and Income sectors. In the Global Growth sector, nearly half (48 per cent) of companies with 20-year track records have increased their dividends every year for at least the last 20 years. In the UK Growth and Income sector, 45 per cent of companies with 20-year records have increased their dividend annually for at least 20 years.
Alan Brierley, head of investment companies research at Collins Stewart, says: "The UK Growth & Income sub-sector offers investors an attractive yield; the current yield is 6 per cent compared with 4.8 per cent for the FTSE All-Share index and 3.5 per cent from a 10-year UK government bond (this margin is at its widest level since the 1950's). In addition, we believe this sector offers investors defensive qualities in these difficult times.
"However, the next couple of years will be challenging for income managers. Although they are faced with the twin spectres of widespread dividend cuts and the loss of bank dividends (which featured heavily in most portfolios), the collapse in sterling should boost revenue streams while lower inflation will reduce the hurdle for those managers with an objective of a real increase in dividends. We would highlight that the revenue reserves of most of these companies are very strong, representing at least one year's dividend."
Within the UK Growth & Income sub-sector, Collins Stewart's favoured stocks are Edinburgh Investment Trust and Perpetual Income & Growth. Mr Brierley says: "Both managers have sought to construct a portfolio of companies that can grow earnings, cash flow and dividends, and there is a focus on defensive growth."
GLOBAL DIVIDEND HEROES
Other strong performers include two global players from F&C. The Foreign & Colonial Investment Trust, which comes seventh in the league table with 38 years of consecutive dividend growth.
