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Equity trusts dominate lists of dividend raisers

Many investment trusts have long records of raising their dividends, but whether they can continue to do so is now uncertain
March 26, 2020

The AIC has published its list of ‘next generation of dividend heroes’ – 25 investment trusts that have raised their annual dividends for at least 10 years in a row, but less than 20 consecutive years.

These include Aberdeen Standard Equity Income Trust (ASEI), which has increased its dividend for 19 years in a row, and TR European Growth Trust (TRG), which has increased its dividend for 17 years in a row.

A reason why investment trusts can keep raising 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 effect that the coronavirus outbreak is having on listed companies, 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. Company dividends in the UK are being cut or suspended, and overseas companies face some of the same pressures due to the Coronavirus outbreak. And investment trust boards may not be able or willing to use their revenue reserves to increase their dividends if the shortfall in income from the trust’s underlying holdings is very large.

Some trusts in non-equity sectors may be in a better position to keep paying an attractive income, depending on what their underlying assets are and to what extent they are under pressure over the coming months. For example, Paddy Dear, manager of Tetragon Financial Group (TFG), which has increased its dividend for 10 years in a row, said: “Tetragon invests in a broad range of assets and aims to provide stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles. Tetragon’s investment objective is to generate distributable income and capital appreciation.”

This year’s next generation dividend heroes list only includes four non-equity sector investment trusts, HICL Infrastructure (HICL), International Public Partnerships (INPP), CQS New City High Yield Fund (NCYF) and Tetragon Financial Group. And the AIC Dividend Heroes list of trusts (published last week) which have raised their dividends for 20 or more years in a row only includes one non-equity trust – Caledonia Investments (CLDN).

A reason why the lists do not currently feature many non-equity investment trusts is because a number of these have launched more recently so do not have 10-year-plus track records. And some trusts focused on non-equity sectors can be very high risk and esoteric, so you should not invest in them unless you have the right level of risk tolerance and a long-term investment horizon.

Law Debenture Corporation (LWDB), meanwhile, which has increased its dividend for 10 years in a row is classified as an AIC UK Equity Income sector trust, but also runs a professional services business, which accounted for about 15 per cent of its net asset value at the end of 2019. This means it is not wholly reliant on the equity market for its revenues.

“Law Debenture plans to continue gradually increasing dividend payments in excess of inflation over time,” said Denis Jackson, chief executive officer of Law Debenture Corporation. “Our differentiated model benefits from our Independent Professional Services business having contributed around a third of all dividends paid in the past 10 years and gives greater flexibility in portfolio construction. We also benefit from a strong revenue reserve position.”

 

Investment trusts which have increased their dividends for 10 years or more in a row
TrustAIC sectorNumber of consecutive years dividend increasedDividend cover (Years)
Aberdeen Standard Equity IncomeUK Equity Income191.15
TR European GrowthEuropean Smaller Companies172.62
AthelneyUK Smaller Companies162.19
BlackRock Smaller CompaniesUK Smaller Companies161.57
BlackRock Throgmorton TrustUK Smaller Companies161.43
Henderson EuroTrustEurope161.3
Henderson Smaller CompaniesUK Smaller Companies161.36
Artemis Alpha TrustUK All Companies151.42
Murray InternationalGlobal Equity Income151.06
Witan PacificAsia Pacific143.07
BlackRock Greater EuropeEurope142.46
Edinburgh Investment TrustUK Equity Income141.67
Henderson European FocusEurope121.72
HICL InfrastructureInfrastructure12*see note
Schroder Oriental IncomeAsia Pacific Income121.15
Standard Life UK Smaller CompaniesUK Smaller Companies121.41
Aberdeen Asian IncomeAsia Pacific Income110.92
Henderson Far East IncomeAsia Pacific Income110.81
International Public PartnershipsInfrastructure11*see note
CQS New City High YieldDebt - Loans & Bonds100.9
Fidelity Special ValuesUK All Companies101.17
Law Debenture CorporationUK Equity Income10*see note
Lowland Investment CompanyUK Equity Income101.14
Schroder UK Mid CapUK All Companies101.47
Tetragon Financial GroupFlexible Investment10*see note
Source: AIC/Morningstar as at 23 March 2020

*Where dividend cover is not shown the trust does not report revenue reserves separately but may have retained earnings.