OpinionJan 27 2016

Optimise those savings

Search sponsored by

Equity income has proven an attractive alternative for those prepared to expose their long-term savings to the vagaries of the stock market. It has proved a shrewd strategy since 2008 as investors have enjoyed a sustained period of dividend and stock market growth.

Yet the outlook is now not so pretty. Falling commodity prices, geopolitical turmoil in the Middle East and a slowdown in China’s economic growth have ravaged stock markets. Dividends are also being cut. Equity income is no longer as sexy an alternative as it was.

With dividends under pressure, it is heartening to note that more financial advisers are waking up to the income protection offered under the umbrella of an investment trust.

I have long been an advocate of investment trusts that strive to generate a combination of income and capital growth for investors. Unlike their unit trust or Oeic counterparts, their quest for income growth is assisted by their ability to put income into reserves in the good years to draw upon in the difficult years when the dividend income from underlying investments is under pressure.

This ability to smooth income payments should not be under-estimated. According to the Association of Investment Companies (AIC), there are 36 investment trusts that have grown their dividend payments every year for at least the past decade. Indeed, Bankers, a global trust managed by Henderson, has just confirmed its 49th year of consecutive dividend increases. Hugely impressive. Only City of London, also managed by Henderson, has a comparable income record.

At the end of last year, I offered readers of The Mail on Sunday a list of these income-friendly investment trusts (it contains lesser-known names such as Brunner, Merchants, Temple Bar and Witan). My email account went into subsequent meltdown (a bit like markets), proving that there is a huge appetite out there for equity income, even when markets are as frothy as they are. Indeed, I am still getting requests for the list despite a further deterioration in world stock markets.

The AIC says that in the first three quarters of last year, purchases of investment trusts on platforms by advisers and wealth managers (the likes of Transact, Alliance Trust Savings and Ascentric) totalled £549m, 55 per cent higher than for the first nine months of 2014.

Interestingly, the most popular trust sectors were all those with an income bent – global and UK equity income, as well as less conventional generators of income such as direct property and infrastructure.