Investment trusts exposed to the UK equity income sector have the potential to double capital and simultaneously raise dividend growth, according to new figures.
The Association of Investment Companies has published research based on Morningstar data which looks at how investment companies can be used to build a pension pot and deliver a growing level of income in retirement.
It found that a £100,000 investment made in an average UK equity income investment company would have netted £124,548 in dividend payments over the past 20 years, while also more than doubling the capital to £215,874.
The trade body for close-ended investment companies said that between December 1995 and December 2015, the annual dividend growth was 4.6 per cent, racing ahead of inflation which averaged 2.8 per cent over the same period.
Annabel Brodie-Smith, communications director at the AIC, argued the figures make a “compelling reason” for investors to consider investment companies as part of a pension portfolio.
She said investment companies can offer freedom to pay income out of capital and flexibility to hold the income to save for tougher times.
Despite this, Ms Brodie-Smith made clear that investment companies should not be a substitute for an annuity, pointing out that doing so would mean putting both income and capital at risk.
AIC UK Equity Income sector
| Capital return (£) | Income received (£) |
31-Dec-96 | 102,836 | 3,826 |
31-Dec-97 | 128,175 | 4,062 |
31-Dec-98 | 138,229 | 4,232 |
31-Dec-99 | 153,248 | 4,516 |
31-Dec-00 | 153,730 | 4,631 |
31-Dec-01 | 136,305 | 4,820 |
31-Dec-02 | 99,275 | 4,992 |
31-Dec-03 | 114,264 | 5,211 |
31-Dec-04 | 128,174 | 5,248 |
31-Dec-05 | 151,669 | 5,548 |
31-Dec-06 | 178,214 | 6,057 |
31-Dec-07 | 164,404 | 6,858 |
31-Dec-08 | 113,809 | 7,441 |
31-Dec-09 | 135,462 | 7,546 |
31-Dec-10 | 162,044 | 7,635 |
31-Dec-11 | 157,874 | 7,870 |
31-Dec-12 | 175,113 | 8,138 |
31-Dec-13 | 215,581 | 8,400 |
31-Dec-14 | 215,548 | 8,525 |
31-Dec-15 | 215,874 | 8,993 |
Compound average annual growth rate: 4.6%
Matthew Harris, director at Fife-based Dalbeath Financial Planning, said investment companies are a “useful part of any investor’s toolkit”.
However, he said he would never recommend that someone invest in a single sector such as UK equity income, pointing to the recent “carnage” in UK dividend payouts, with many mining and energy companies recently cutting or cancelling dividends due to falls in commodity prices.
“What these figures demonstrate admirably is the power of staying invested in financial markets over a long period of time, because you can enjoy compound growth rates, especially if you reinvest the dividends you receive as most clients do.
“This is why the best advice is usually to ensure you have the right portfolio to start with, then leave it alone and avoid dipping in and out of markets.”
katherine.denham@ft.com
