- The trusts that target rising payouts over time
- We assess some names and useful metrics
High dividend yields can be hard to resist, and there are many currently on offer in the investment trust universe. But a high yield can reflect recent price volatility, as with embattled Home REIT (HOME), or be a result of an especially esoteric portfolio, an example being Fair Oaks Income (FAIR). A high yield is not always a free lunch.
A more important consideration, however, is whether a trust can grow its dividend over the long term and help investors to offset the ravaging effects of inflation. Trusts that can do this may well prove more useful as long-term holdings than the highest yielders.
The biggest names with a committed stance on this front are well-known. Funds on the Association of Investment Companies (AIC) dividend heroes list, such as UK income stalwart City of London Investment Trust (CTY), which was recently on a 4.7 per cent yield, and Bankers Investment Trust (BNKR), recently on 2.3 per cent, have raised their dividends for at least 20 years in a row. And names such as Murray International Trust (MYI) are included in the AIC's list of “next-generation dividend heroes” after having increased their dividends for at least 10 years in a row.
Both lists are a useful starting point if you want to find funds committed to growing their dividends over time. However, the criteria used mean that many trusts in less mature sectors fail to make the cut. So at a time when the merits of rising dividends are especially obvious, it's worth finding out which other trusts stand out for offering greater payouts over the years.
In-built linkage
Given the inflation-linked nature of some of their revenues, it’s unsurprising to see trusts invested in real assets standing out. Daniel Lockyer, senior fund manager at Hawksmoor, highlights the “newer breed” of trusts focused on real assets, such as battery storage investor Gresham House Energy Storage Fund (GRID), ship leasing specialist Taylor Maritime Investments (TMI) or renewables fund Greencoat UK Wind (UKW). “While not dividend heroes, given their relatively short lives, they all have attractive yields, very good dividend cover and have committed to grow the dividend,” he says.
Greencoat UK Wind, for one, noted in its recently published full-year results that its dividend target for 2023 had risen in line with a recent measure of Retail Price Index (RPI) inflation. Increasing the dividend in line with the retail price index (RPI) is also a key part of its investment objective.
The renewables trusts have held up especially well amid the recent surge in inflation thanks to higher power prices, although were vulnerable to a rise in gilt yields late last year. However, it’s worth noting that not all of these types of trusts are committed to increasing their dividends in line with inflation. A commitment that the trust will do this or at least increase the dividend over time can be one key detail to seek out in its documents and reports. QuotedData's head of investment company research, James Carthew, notes that NextEnergy Solar Fund (NESF) has maintained a policy of matching its dividend increases to inflation for now, although its board is more generally committed to a progressive dividend policy.
For those who don't simply wish to take a board's word that the dividend will continue to rise, some metrics might indicate whether it seems feasible. One useful approach is to check that the trust's dividend cover ratio amounts to at least one times. Greencoat UK Wind stands out on this front, with its recent results reporting that its dividend cover came to a substantial 3.2 times.
What’s priced in?
A tricky balancing act for investors keen on dividend growth is deciding how low a yield they will accept to invest in a trust that increases its payouts over time. Some may simply seem too low if you already want a decent level of income generation, and even some of the dividend heroes have yields that seem pretty modest. For example, Bankers Investment Trust recently had a 2.3 per cent yield and fellow dividend hero Alliance Trust (ATST) offered a similar amount.
This, fortunately, has tended not to be a problem for renewable energy infrastructure and generalist infrastructure trusts. Some other real asset trusts also have decent yields and dividend growth ambitions to match, although if you invest in these you need to accept that there may be challenging times ahead.
| Some promising dividend growers | |||||
|---|---|---|---|---|---|
| Investment trust | Portfolio earnings yield | Current dividend yield | Earnings yield net of costs | Estimated five year earnings yield | Cover* |
| BlackRock Energy and Resources Income | 10% | 3.10% | 9.00% | 19.30% | 6.3 |
| Temple Bar | 13% | 3.60% | 12.00% | 22.50% | 6.2 |
| Utilico Emerging Markets | 11% | 3.30% | 9.00% | 18.30% | 5.6 |
| abrdn Asia Focus | 8% | 3.20% | 6.70% | 16.60% | 5.1 |
| Diverse Income Trust | 11% | 4.10% | 10.30% | 20.40% | 5 |
| Law Debenture Corporation | 10% | 3.80% | 9.10% | 16.90% | 4.4 |
| Invesco Asia | 9% | 3.70% | 8.40% | 16.00% | 4.3 |
| Edinburgh | 9% | 3.70% | 8.90% | 15.50% | 4.2 |
| JPMorgan Global Markets Income | 9% | 3.50% | 7.90% | 14.70% | 4.2 |
| Lowland | 11% | 4.50% | 9.70% | 18.40% | 4.1 |
| Source: Killik & Co/Morningstar. *Five-year earnings per share yield/current dividend yield | |||||
That’s certainly the case for the property sector, which could suffer if there is a bruising recession. FundCalibre managing director Darius McDermott points to names such as logistics play Tritax EuroBox (BOXE) and Supermarket Income REIT (SUPR), which has inflation-linked rental agreements with companies such as Tesco (TSCO). If you are considering investing in these, you will have to weigh up the recession risks and the low valuations on offer. The average trust in the AIC Property – UK Commercial sector recently traded on a share price discount to net asset value (NAV) of nearly 23 per cent and a dividend yield of 6.3 per cent.
As with some of the other funds mentioned here, you might wish to turn to specialist funds with less economic sensitivity. One property name Carthew highlights is care home fund Impact Healthcare REIT (IHR), which targets dividend growth in line with inflation-linked rental uplifts from its portfolio. Its shares recently traded on a yield of nearly 7 per cent and an 8.3 per cent discount to NAV.
Back to basics
The overwhelming presence of equity trusts in the AIC's dividend heroes list shows how well shares can act as a source of rising payouts over time. But identifying equity portfolios with promising dividend growth prospects can be tricky. To cite one potentially useful metric, the AIC's data pages on investment trusts show an annualised measure of a trust's dividend growth over five years. This metric might be useful in some cases but can be distorted by a change in approach. For example, a decision by some JPMorgan equity trusts to start paying out a percentage of portfolio NAV each year may give an exaggerated sense of dividend growth.
That said, calculations made by others could provide a useful point of reference for investors seeking dividend growers. Killik & Co head of managed portfolio services, Mick Gilligan, has used Morningstar data to calculate the earnings yield of a trust portfolio after costs, then applied growth expectations to estimate an earnings yield in five years' time and compared this with the current yield to see how much scope there is to grow the dividend over that period.
Gilligan ran the data for equity trusts with a market cap of at least £100mn and a yield of at least 3 per cent, and the ones that have the highest scores, according to the criteria set out above, are listed in the table. They include a variety of trusts, from pandemic-era dividend cutter Temple Bar Investment Trust (TMPL) to Diverse Income Trust (DIVI), which looks further down the market cap spectrum in the UK for its dividends, and some emerging market funds. So this list includes some slightly less established names in the equity space too.
