Up-and-coming investment trust dividend heroes

Not surprisingly, this list is topped by three UK Equity Income sector trusts - Invesco Income Growth (IVI), Perpetual Income and Growth (PLI) and Standard Life Equity Income (SLET) - which have respectively raised their dividends for 19, 17 and 16 consecutive years.

But no fewer than four out of 18 trusts in this list come from the UK Smaller Companies sector - an area not traditionally associated with dividends. These are Athelney (ATY), BlackRock Throgmorton Trust (THRG), BlackRock Smaller Companies (BRSC) and Henderson Smaller Companies (HSL). European Smaller Companies trust TR European Growth (TRG), which has increased its dividend for 14 consecutive years, also features in the list.

However, in most of these cases the yield is lower than that of broad indices such as the FTSE All-Share, which yields about 3.5 per cent.

"But these have been able to tap in to a differentiated source of income that is maybe less correlated to markets and macro trends, and maybe more to do with the underlying companies they invest in," said Ewan Lovett-Turner, director of investment companies research at Numis Securities.

These trust's managers are also a factor in terms of their ability to raise dividends. For example Neil Hermon has run Henderson Smaller Companies since November 2002, soon after which the trust started its 13-year run of raising its dividend annually.

There are two new additions to this year's list of Next Generation Dividend Heroes - Henderson European Focus Trust (HEFT) and Schroder Oriental Income Fund (SOI), which have both increased their dividends for 10 consecutive years.

"There are a healthy number of next-generation dividend heroes waiting in the wings, which have increased their dividends each year for between 10 and 20 years," said Annabel Brodie-Smith, communications director at the AIC. "Investment companies' ability to smooth dividends allows them to hold back some income for tough times ahead and is a key advantage of the structure."

Although these trusts do not have such long records as the 'Dividend Heroes', which have raised their dividend for 20 consecutive years or more, this is in part because some of the Next Generation have launched more recently. And some of these have raised their dividends for most of their existence. For example, Invesco Income Growth launched in March 1996 and has increased its dividend every year for 19 years, and Schroder Oriental Income launched in July 2005 soon after which it started increasing its dividend on an annual basis.

"I would expect boards to continue to support dividend increases, especially as a number of these trusts are income-focused and they are acutely aware of investor demand for this," said Mr Lovett-Turner.

Some of the Next Generation trusts have a higher level of revenue reserves than trusts with a 20-year-plus record of raising their dividend. However, Mr Lovett-Turner points out that if they have a lower absolute yield alongside decent reserves, the number of years of dividends covered by their reserves will be higher.

"Ultimately you want a trust's earnings to cover its dividend so it doesn't need to use its reserves," he added. "You want a bit of a buffer in terms of the size of the reserve and good earnings, so you can be reasonably comfortable with those that have long records of increasing dividends [even if the revenue reserve doesn't cover many years]. Ideally you should look for managers that can cover dividends from earnings."

Next Generation Dividend Heroes

Source: AIC using Morningstar

Yield figure as at 28 March 2017