Jeff PrestridgeFeb 26 2020

Investment trust captures dividend story best

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These are difficult times for those in need of income, especially individuals with little appetite for investment risk.

Savings rates are going nowhere and, if anything, are edging down rather than up – à la National Savings & Investments.

Meanwhile, yields on bonds are about as attractive as a night spent in a lion’s cage with a famished lioness. 

For many elderly people, like my mother, they really have nowhere to turn to in order to boost the income they receive on top of their state pension and flat-rate annuity.

My mother, who is well into her 80s, does not trust the internet, which is where most of the best savings deals are available, and shares hold no truck with her.

She is at the mercy of the High Street banks and boy don’t they know it.

Anything above 0.1 per cent in annual interest – without strings attached – is currently a bonus from a savings account.

Mum is not happy and is not impressed with my suggestion that she should look beyond the savings offerings of the big banks.

“Marcus? Goldman Sachs? Never heard of them, Jeffrey. On your bike.”

Of course, for those with longer-term horizons, there still remains one income story just about intact.

Step forward the glorious company dividend.

Trusts have far greater control than funds over the way they distribute income from their shareholdings to loyal shareholders.

While no investment adventure is without risk, the opportunity to enjoy a reasonable dividend yield – around 4 per cent if investing in the UK stock market – with the hope (not expectation) of income growth remains a compelling one.

And that is not accounting for any long-term capital return that may result from the investment.

Earlier this year, Link Group took time out from handling the messy breakup of the Woodford empire to report that UK dividends would yield on average 4 per cent this year.

An attractive number when set against the 0.1 per cent available from the typical instant saver account (0.05 per cent if you happen to be a Halifax Liquid Gold saver).

But Link warned that underlying dividend payouts would dip this year by 0.7 per cent – a result, primarily, of a stronger pound (two fifths of UK dividends are declared in US dollars). So, not all win, win.

Yet, the global outlook for global dividends looks a little rosier if asset manager Janus Henderson is to be believed.

In its latest report on the state of health of dividends worldwide, it said global dividends rose 3.5 per cent last year with the strongest growth coming from North America, emerging markets and Japan.

This year, it expects equivalent growth of 3.9 per cent.

Ben Lofthouse, one of the managers at the helm of the £750m Janus Henderson Global Equity Income fund, said: “For the year ahead, the market expects the global economy and company profits to continue to expand, meaning dividends can grow further.

“2020 is on track to deliver the fifth consecutive year of record dividends.”

Although the coronavirus could well put a spanner in the works – dampening down global economic growth, company profits and corporate generosity on the dividend front – most of the evidence confirms Mr Lofthouse’s positive outlook.

Corporate earnings, especially in the US, should continue to grow this year.

While I do not expect all financial advisers to agree with me, I think the best way to capture this dividend story for clients is through investment trusts.

This is because trusts have far greater control than funds over the way they distribute income from their shareholdings to loyal shareholders.

By being allowed to build up income reserves, they can smooth out the dividend ride for investors – maybe tucking some income away in the trust’s reserves when the dividend backdrop is healthy, and then drawing upon some of it to top up income payments to shareholders when the wider dividend environment is more hostile.

I was reminded of the beauty of this income control mechanism last week when the Scottish American Investment Company confirmed its 40th year of consecutive dividend increases.

Managed by investment behemoth Baillie Gifford, the £630m global trust increased its dividend by 3.3 per cent.

With just short of a year’s dividends tucked away in reserves, you would put money on 40 becoming 41 this time next year.

Scottish American is one of 21 investment trusts with annual dividend growth records going back at least 20 years.

Like Scottish American, many of these 21 are global in investment outlook so are perfectly positioned to benefit from the positive dividend picture painted by Janus Henderson. 

But there are also a smattering of UK equity income trusts among them.

Perfect fare, I would have thought, for income-seeking clients.

Jeff Prestridge is personal finance editor of The Mail on Sunday