InvestmentsFeb 7 2017

UK equity income dividend outstrips inflation 

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UK equity income dividend outstrips inflation 

The level of dividend dished out by investment trusts in the UK equity income sector has raced ahead of inflation over the past twenty years, according to the latest figures.

Interest rates have lingered around the zero mark for years which has left investors hungry for some kind of yield.

But the Association of Investment Companies has assembled data which showed that investors who put their cash into an average UK Equity Income investment company back in 1996 would have seen average dividend growth of 4.5 per cent each year.

Dividends can be a crucial source of income for investors Annabel Brodie-Smith

These findings come amid concerns that rising inflation could dampen the real value of investors’ returns.

But the AIC has pointed out that the equity income sector would have outpaced the retail prices index – which is one of the measures of inflation – over the past twenty years.

The annualised retail price index between 1996 and 2016 stands at nearly 2.8 per cent.

Annabel Brodie-Smith, communications director at the AIC, said the income track record is one of the “crowning glories” in the investment company sector.

She said investment trusts have structural advantages, pointing to their ability to “squirrel away” some of the income received each year for tougher times.

Investment trusts are also able to smooth dividends over time, either by paying them out of capital profits or using gearing.

The AIC, which collected the data from Morningstar, also said the capital value of the investment would have more than doubled in twenty years, on top of the income generated.

Ms Brodie-Smith said: “Dividends can be a crucial source of income for investors, and could well become all the more so in the context of rising living costs."

The challenge for many investors is to hold enough equities to beat inflation, while not taking too much risk. Patrick Connolly

This comes amid warnings that the hike in inflation could encourage savers to invest their money in riskier assets.

Yet the AIC director said for those who are prepared to accept the risks, these figures make a "compelling case" for investment companies to be considered as part of a long-term income portfolio.

Patrick Connolly, certified financial planner at Chase de Vere, said: "The best way to beat inflation is to hold growth assets, such as equities, which can be expected to outperform over the longer-term.

"Both UK and global equity income funds, which provide a steady dividend stream, are ideal for this purpose."

Yet Mr Connolly said the challenge for many investors is to hold enough equities to provide growth potential and beat inflation, while not holding so many that they are taking too much risk.

"While it might sound a little boring, the right approach to beat inflation is by investing in a balanced portfolio which includes equities."

This, he said, provides growth potential, while the more "secure" assets such as cash and fixed interest aim to provide diversification and help manage risks.