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Morningstar Education
Investment Trusts Solutions
The Role of the Revenue Reserve
Slide 2: The Role of the Revenue Reserve

The revenue reserve has a key role to play when it comes to maintaining a regular flow of dividend payments. The investment company can retain part of their dividend income each year and transfer this to their revenue reserve. Think of it as being like a company keeping part of its profits for use in future years; this is a distinct advantage that the closed-end company structure has over other investment vehicles as it can behave in many ways like a normal company.

Slide 3: The Role of the Revenue Reserve

This ability to "bank" some of its dividend income means the company can dip into this reserve account when it needs to in difficult years to help make up any shortfall in dividends in the current year. If you're a shareholder who's reliant on that income, you don't need to worry about whether that payment will be made and/or whether it will be cut so long as the revenue reserve is sufficient to cover any shortfall. Given their long trading history, many funds have been able to build up substantial reserves over the years.

Slide 4: The Role of the Revenue Reserve
Dividend growth also has a role to play in achieving steady long-term returns for the company and the extent of the revenue reserve can help shape your opinion on the health of that company and what its future may look like. Traditionally a UK specialty, there are an increasing number of income-biased global closed-end funds, which can help to diversify a portfolio where income is important. Not all such global funds have proven their ability to pay regular dividends so those looking to areas such as emerging markets for dividend payments will carry more risk when compared with developed markets.
Slide 5: The Role of the Revenue Reserve

Finally, when looking at income-generating companies, don't just focus on the current dividend yield. Look back at the dividend history using our CEF QuickTake and here you'll be able to see the last five dividend payments made by the company, as well as the current discount, its 1-year high and low and the 1-year Z-statistic. For a full explanation of the Z-statistic, read "Understanding the Z-Stats on Investment Companies."

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