- Many investment trusts are offering healthy dividend increases, but keeping with current levels of inflation is a challenge
- Catching up might take multiple years
Investment trusts are announcing below-inflation dividend increases, making it more difficult for investors to maintain the real value of their income – although some might be able to catch up in 2024 or 2025.
Last week, core infrastructure trust HICL Infrastructure (HICL) said it intends to maintain its flat dividend target for the years to March 2024 and 2025, which Stifel analysts deemed “disappointing given higher inflation”. Infrastructure trusts have inflation linkage built into their revenues and are at an advantage in inflationary environments, although they still have to contend with discount rates.
With consumer price index (CPI) inflation standing at 8.7 per cent in April, HICL is not the only trust that cannot afford to keep up with it, although others are coming closer.
James Carthew, head of investment company research at QuotedData, said it was “extremely hard” for trusts to keep pace because, for most of them, higher inflation does not mean improved revenues. In fact, having to contend with higher interest rates and price increases means that companies might have to be more cautious with their income distributions, just when inflation is eating away at their real value.
Even when company dividends look healthy, investment trusts are not always in a position to pass them on in their entirety. For example, last year's dividends for the FTSE All-Share were up about 16 per cent on 2021, a level the major trusts in the UK equity income sector have not been able to match so far.
Post-pandemic recovery
Mick Gilligan, head of managed portfolio services at Killik, said that trusts need to rebuild reserves after the decline in income that followed the pandemic. “Although the dividends paid from the UK market are up markedly on 2021, the overall dividend level is still below the pre-pandemic peak,” he noted.
Temple Bar (TMPL) saw one of the biggest increases, with its 2022 dividends up by 18.4 per cent on 2021 levels, but this came after it had to cut its dividend during the pandemic due to a big fall in net asset value exacerbated by high leverage.
By contrast, Law Debenture (LWDB), Merchants (MRCH) and JPMorgan Claverhouse (JCH) continued to increase their dividends during the pandemic, but had to dip into reserves to do so. In 2022, they upped their dividends by 5.2 per cent, 1.1 per cent and 8.2 per cent, respectively. JCH also said it intends to increase the first three quarterly interim dividends in 2023 by 6.7 per cent.
“All things considered, I think 5-10 per cent dividend growth feels about right,” said Gilligan.
For 2023, much will depend on whether the UK does manage to avoid a recession and when interest rates peak, although analysts still seem fairly optimistic. According to AJ Bell’s dividend dashboard, as of 24 March, the investment platform estimated aggregate dividend growth for the FTSE 100 of 11 per cent in 2023 and 7 per cent in 2024.
Within the global equity sector, the trusts featured in the Association of Investment Companies’ dividend heroes table also saw below-inflation increases, with F&C IT (FCIT) raising its dividend by 5.5 per cent and Witan (WTAN) by 3.6 per cent. Bankers Investment Trust (BNKR) upped its dividend by 6.9 per cent in the year to October 2022, and is planning at least a 5 per cent increase this financial year. These trusts also have relatively lower yields than their income-focused counterparts, such as Murray International (MYI), which increased its dividend by 1.8 per cent in 2022.
A few trusts that pay dividends out of capital link their dividends to their underlying share performance. Invesco Perpetual UK Smaller Companies (IPU), JPMorgan Japan Small Cap Growth & Income (JSGI) and International Biotechnology (IBT) all have fairly chunky yields, but their dividends equate to 4 per cent of their net asset value (NAV), so they can go up and down in any given year.
Infrastructure trusts
While equity trusts do not often give guidance on future dividend increases, most trusts in the infrastructure space do, and the outlook is mixed. Even with inflation and high energy prices helping their performance in 2022, some infrastructure and renewable energy trusts are planning below-inflation dividend increases in 2023.
In the renewables sector, Greencoat UK Wind (UKW) has announced a 13.4 per cent divided hike for 2023, while NextEnergy Solar (NESF) intends to put its payout up by 11 per cent in the year to March 2024.
But JLEN Environmental Assets (JLEN), The Renewables Infrastructure Group (TRIG) and Greencoat Renewables (GRP) are planning less spectacular increases at 6 per cent, 5 per cent and 4 per cent, respectively. And core infrastructure trust International Public Partnerships (INPP) intends to maintain its 2.5 per cent dividend growth target. While better than HICL, this falls considerably short of inflation, and below the 6 per cent increase promised by the third trust in the sub-sector, BBGI Global Infrastructure (BBGI).
Once inflation settles, many of these trusts should be able to catch up in later years. BBGI, for example, is targeting a further 6 per cent dividend increase for 2024. But for 2023, investors who rely on the income paid by their assets may have to resign themselves to seeing their dividends' real value decline.
