How have the investment trust dividend heroes performed?

Investment trusts have done extremely well in terms of protecting income investors in the past year, but even they have limits. Link Group's latest Investment Trust Dividend Snapshot reported that total payouts from equity trusts had fallen in the first half of 2021 – the first decline in a decade.

While trusts including Troy Income & Growth (TIGT), Edinburgh Investment (EDIN) and Temple Bar (TMPL) have all announced dividend cuts, others have held the line. The Association of Investment Companies (AIC) says that total trust dividends actually rose by 11 per cent year on year in the first half of 2021, once alternative asset classes were accounted for, and equity trusts broadly shielded investors from the pain of pandemic-era dividend cuts. Analysts at broker Stifel note that although the three names mentioned above cut their payouts, 18 other trusts in the AIC UK Equity Income sector have either maintained or increased their dividend in the first six months of this year. They argue that a handful of cuts have skewed the overall figures.

Either way, it is a good time to assess the prospects of dividend-oriented trusts as company payouts appear to be recovering. And when it comes to trusts known for their long track records of rising payouts, it is also worth looking at how they have fared versus rivals.

Heroes or villains?

A useful starting point for income investors is the AIC’s 'Dividend heroes', a list of the trusts that have increased their dividends every year for at least 20 years. Although the 20-year requirement skews the list to equity trusts and away from newer asset classes, it highlights trusts that have remained committed to a progressive dividend, helping investors to account for inflation.

The Dividend Heroes include income stalwarts such as City of London Investment Trust (CTY), the UK equity income fund that tops the list and has upped its payout for 55 years in a row. Its shares recently traded on a dividend yield of nearly 5 per cent.

But not all of these names might spring to mind as income plays. The most obvious example is Scottish Mortgage Investment Trust (SMT), which has a clear focus on capital growth rather than income. Its dividend yield was just 0.25 per cent on 24 August. Six other trusts in the list had dividend yields of less than 2 per cent, suggesting fairly slim pickings for income investors. Some of these, including BMO Global Smaller Companies (BGSC) and F&C Investment Trust (FCIT), take a total return approach to investing rather than explicitly seeking income.

But others do tick the income box. Reflecting the dividend culture of the market they invest in, UK equity income names including Aberdeen Standard Equity Income Trust (ASEI), Merchants Trust (MRCH), City of London, JPMorgan Claverhouse Investment Trust (JCH), Schroder Income Growth Fund (SCF), Murray Income Trust (MUT) and BMO Capital & Income Investment Trust (BCI) all recently traded on dividend yields in excess of 3 per cent. Value and Indexed Property Income Trust (VIP) also offered a high yield, while shares in the the value-oriented global equity fund Scottish Investment Trust (SCIN) traded on a yield of around 3 per cent.

Performance

What’s notable is how differently some of these funds fared during the pandemic. Merchants Trust had a harder 2020 than many of its peers, with a share price total return fall of 14.3 per cent. But the trust appears to have captured much of the subsequent UK recovery and had made a share price total return of 23.8 per cent between the start of the year and 24 August, making it the second-best performer in the AIC UK Equity Income sector.

Merchants has a reasonable weighting to large-caps, with more than 60 per cent of its portfolio in FTSE 100 shares at the end of July. But unlike some of its peers it invests further down the market cap spectrum and also had roughly a quarter of its assets in the FTSE 250 and a modest allocation to smaller companies.

The trust's manager, Simon Gergel, told Investors’ Chronicle in late 2020 that he and his team were sticking with a slight value bias at the time. He also stressed a desire to make the trust more defensive, having taken money out of cyclical names such as Sirius Real Estate (SRE) and Informa (INF) which faced uncertainty amid the pandemic, while also buying into sectors he viewed as resilient, including utilities, tobacco and telecoms.

JPMorgan Claverhouse Investment Trust has also had a good run this year, having struggled in 2020. As the trust’s board noted in its recently published half-year report, it has benefited from significant exposure to more cyclical stocks, including banks, miners, oil companies and domestic small-caps, accessed partly via the trust’s holding in JPMorgan Smaller Companies Investment Trust (JMI). High levels of gearing (debt) also boosted performance for JPMorgan Claverhouse, while standout performers in its portfolio during the first half of 2021 included Ashtead (AHT), Future (FUTR) and Softcat (SCT). The trust's managers are now attempting to strike a balance between cyclical recovery names and more defensive holdings.

Yet some names from the list have lagged their peers. City of London is trailing many of its peers so far this year and in 2020 was roughly in the middle of the AIC UK Equity Income sector by share price total returns. Murray Income, by contrast, proved relatively defensive in 2020 compared with its peers but has trailed some other names in the sector this year.

Some of the disparities are more severe when it comes to higher-yielding global equity trusts on the AIC Dividend Heroes list. Having struggled for several years, the contrarian Scottish Investment Trust benefited from the recent value rally but is still far from the front of the pack. At time of writing, it was 10th out of 17 trusts in the AIC Global sector by 2021 share price total returns, lagging names such as Scottish Mortgage. Scottish Investment Trust's board is considering changing the investment manager who runs it.

Of the other global names with higher dividend yields, Scottish American Investment Company (SAIN), a trust managed by Baillie Gifford, has tended to outperform other global equity income trusts but so far this year lags them slightly. Like some other global equity income names it is underweight North America relative to global equity indices as the US equity market tends to offer modest yields. Witan Investment Trust (WTAN) has been performing roughly in line with the AIC Global sector average this year.