Investment trusts continue to raise dividends, but future increases under threat

With interest rates falling the reliability of income streams is even more important. And in difficult market conditions investors can continue to receive dividends even if share prices of investment trusts they hold have fallen.

Part of the reason why investment trusts can keep increasing their dividends is because they can hold back up to 15 per cent of the income they receive from their holdings each year in a revenue reserve. This means that in years when underlying investments do not pay out enough income for dividend increases they can draw on some of the money in their revenue reserves.

However, due to the current extreme situation, the extent to which investment trusts will be able to continue to increase dividends in the next year or further down the line is uncertain. This partly depends on the size of trusts’ revenue reserves and dividend cover – how many years the current revenue reserve could pay the amount of dividend the trust paid out in its last financial year. You can check this information at www.theaic.co.uk.

But what income trusts get from their underlying holdings is a key factor. “I think it is quite likely that a lot of companies will use [this situation] as an excuse [to cut dividends] even if they are not desperate to conserve cash," said David Liddell, chief executive of online investment service IpsoFacto Investor. “So I would be quite cautious of dividends. While investment trust revenue reserves are nice, if boards of investment trusts see the underlying income falling rapidly they are not going to dip into reserves hugely to hold up dividends. Global equity income trusts have oil company exposure, while [some] UK equity income trusts are very dependent on sectors at risk of dividend cuts, such as oil, banking and to some extent tobacco.”

AIC dividend heroes as at 16 March 2020

Source: AIC/Morningstar