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How 5 investment trusts have grown their dividends for over 30 years

7 August 2017

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Four investment trusts have increased their dividend for over 50 years. What’s more 21 trusts have grown their annual dividend for at least 20 years.

This is no mean feat. Over the past few decades these trusts have grown their income despite several economic downturns, during which time many companies have slashed their own dividends.

It is easy to see why investors covet a regular and growing income. The Federal Reserve has already started to raise interest rates in the US, but in the UK interest rates look set to remain lower for longer. Inflation is now also on the rise, which has the potential to erode investors’ capital, so the merits of investing with companies offering attractive and rising dividends is clear. It’s important to remember that dividends are not guaranteed, nor are they a reliable indicator of what you will receive in future. The value of investments can fall as well as rise, so investors could make a loss.

Why investment trusts for income?

Investment trust managers have a number of tools at their disposal to boost the income paid to investors. They are not required to distribute all dividends received from the underlying shares every year. During periods of strong dividend growth, investment trusts are able to put some income aside for another day and can retain up to 15% of their income each year. This enables them to smooth dividend pay-outs to investors during more challenging periods.

Since 2012 it has also been possible for investment trust managers to sell investments and distribute the profits as dividends to investors. Few managers have used this flexibility, although it does provide them with further powers to enhance dividends if deemed appropriate.

Investment trusts also have the ability to use ‘gearing’. This is where the trust’s manager effectively borrows money to invest, which has the potential to boost the yield on offer. If the manager makes the right decisions and the investments perform well this can increase both income and capital growth. However, the extra return must be enough to offset the cost of gearing and, as well as magnifying gains, gearing magnifies losses when share prices fall so it is a higher-risk approach.

Great track records of growing income

The trusts that have successfully increased their dividends year-on-year invest across a variety of sectors and their objectives vary from fund to fund. Here I look at the five UK focussed equity income investment trusts with the best income records. The UK is well-known for its strong dividend-paying culture and many companies demonstrate an unparalleled record of progressive dividend growth.

Past performance is not a guide to future returns. Source: AIC, correct at 29 June 2017

City of London offers investors a traditional equity income portfolio. It has a bias towards larger companies and Job Curtis, the trust’s manager, seeks companies with an attractive dividend yield, robust balance sheets and strong cash generation.

Similarly, Merchants Trust focuses on larger UK businesses and predominantly invests in well-established FTSE 100 companies. The manager seeks those that generate large amounts of cash and are putting it to good use, including paying dividends. A contrarian standpoint is often taken, with the manager looking to go against the herd and find out-of-favour opportunities.

Alastair Mundy, manager of Temple Bar, is also a natural contrarian. He aims to purchase shares in companies when sentiment towards them is poor and they are undervalued, but where he sees a recovery on the horizon. He currently has a preference for UK companies reliant on consumer spending, such as banks and retailers, which have been shunned by many investors due to the uncertainty caused by Brexit, but he believes offer good value.

JPMorgan Claverhouse invests in UK companies of all sizes – while it maintains a core of larger businesses, it also invests flexibly across medium-sized and higher-risk smaller companies. A focus on reasonably-valued, well-managed and well-financed companies could stand the trust in good stead over the longer term.

Murray Income is another mainstream UK equity income trust. In contrast to Temple Bar, the manager is less positive about the UK consumer and the trust has a bias towards companies that earn a greater proportion of their earnings overseas. The manager favours companies in possession of strong balance sheets and good business models, which can be purchased at attractive valuations.

Investment Trust Market cap Years of consecutive dividend growth Yield 20-year share price total return Gearing
City of London £1,457m 50 3.72% 331.0% 5%
JPMorgan Claverhouse £371m 44 3.39% 253.3% 17%
Murray Income £528m 43 4.07% 326.1% 6%
Merchants Trust £517m 35 5.09% 309.7% 19%
Temple Bar £863m 33 3.15% 540.0% 12%

Past performance is not a guide to future returns. Source: AIC, Hargreaves Lansdown correct at 29 June. Share price source Lipper IM correct at 31/07/17.

Annual percentage growth
July 12 -
July 13
July 13 -
July 14
July 14 -
July 15
July 15 -
July 16
July 16 -
July 17
City of London 27.9 5.6 11.2 3.2 10.5
JPMorgan Claverhouse 42.2 9.7 7.4 -3.2 22.4
Murray Income 26.3 1.2 -4.1 4.8 14.9
Merchants Trust 45.4 3 -0.3 -3.8 17.1
Temple Bar 36.7 2.8 -0.2 -1.7 19.2

Past performance is not a guide to future returns. Source: Lipper IM, to 31/07/17.

This article is not personal advice. If you are at all unsure whether any investment is suitable for your circumstances, you should seek advice.

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Investment notes
No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

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