The 'dividend hero' list run by the Association of Investment Companies (AIC) is a useful starting point for income hunters. Showcasing those investment trusts that have increased their annual dividend payout for at least 20 years in a row, it points out some of the funds that should protect an income against inflation, at least to some extent.
Income can come in so many forms, and that’s something we see in the (very gradual) development of the list. The need for a 20-year track record means older asset classes tend to dominate the list, and it’s almost exclusively populated by equity funds. Plenty of these are dedicated income portfolios, from City of London (CTY) to Murray Income (MUT), Scottish American (SCAM) and Schroder Income Growth (SCF). Investors should know what to expect from such names: a competitive level of yield and a focus on steady dividend payers, often in the large-cap universe. That should satisfy requirements for yield, but it also leaves investors reliant on one segment of the equity universe.
With such considerations in mind, it’s interesting to see that three UK smaller companies funds, Athelney (ATY), BlackRock Smaller Companies (BRSC) and Henderson Smaller Companies (HSL), have made the list this year. We wouldn’t tend to associate such funds with income, but it seems dividends can be had here – and even some decent yields if you buy at the right point. Athelney recently had a share price dividend yield of 4.9 per cent, with BlackRock Smaller Companies on 3.1 and the Henderson trust on 3.9 per cent. It’s worth noting, however, that in the latter two cases the yield figure will have risen on the back of some poor share price performance in the past year.
Such funds aren’t exactly the bedrock of an income portfolio. It’s notable that manager Roland Arnold stresses that he seeks companies with the capacity for cash flow generation rather than specifically looking for high-yielding names. Smaller companies are not guaranteed income plays, and come with a level of volatility not always welcome. But they might nevertheless give an edge to those investors who want some portfolio growth alongside their income and some diversification.
The AIC’s 'next generation of dividend heroes' list, cataloguing trusts that have upped their dividend for 10 or more years in a row but fewer than 20, hints at how the income offering has developed over time. The list includes some more regional income funds such as Henderson Far East Income (HFEL) and North American Income (NAIT), infrastructure stalwart International Public Partnerships (INPP) and even some private equity trusts. These add a level of diversity: battered as its shares have been in the past year, HFEL comes with a high yield that might seem more attractive than the reasonably modest yields of global funds in the heroes list such as Alliance Trust (ATST). But the higher yields come with greater risk, meaning investors might want a mixture.
Also remember where yields come from and that not all asset classes are naturally suited to dividend generation. If we were to compile a 'dividend villains' list, some might include Princess Private Equity (PEY), which upset investors earlier by suspending its dividend on the back of issues relating to currency hedging.
