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45 Years of Dividend Growth

Income-seeking investors may want to take another look at investment trusts

Alanna Petroff 12 March, 2012 | 1:57PM

A handful of dividend-paying investment trusts have been steadily increasing their dividend for the last 45 years, according to Morningstar data and the latest research from the Association of Investment Companies (AIC). City of London Investment Trust (CTY), Alliance Trust (ATST) and Bankers Investment Trust (BNKR) are three closed-end funds that have been able to consistently increase their dividends over the last 45 years, regardless of market peaks and troughs, according to Morningstar data. Caledonia Investments (CLDN) also has a solid track record, with 44 consecutive years of dividend boosts.

"The investment [trust] sector has a long and proud history of delivering returns for shareholders, and what many shareholders are increasingly looking for is a reliable dividend in unreliable times. Investment companies have been aware of the importance of yield for years and the sector’s dividend track record is unparalleled,"said Annabel Brodie-Smith, communications director at AIC, which is a trade organisation for UK-based investment trusts. "Of course dividend increases can never be guaranteed, but investment trusts have a structural advantage over other funds because they are able to squirrel away up to 15% of the income they receive each year into their revenue reserves to help boost dividends in more difficult years. This is known as 'dividend smoothing'."

Jackie Beard, director of closed-end fund research at Morningstar UK, says investment trusts continue to present an opportunity for income-seeking investors.

"Given the raft of dividend cuts by the banks in 2009 and the subsequent drop-off in income paid by open-end funds, shareholders in these investment trusts will have welcomed some prudent decisions by the fund boards in retaining income in the revenue reserve accounts for just such a time," said Beard.

Amongst the investment trusts that have been hiking up dividends for 45 years, the City of London Investment Trust is the only one to receive a Gold rating from Morningstar analysts. This Gold rating indicates that analysts believe the fund will outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term.

Job Curtis has been at the helm of the City of London Investment Trust for the last two decades, and Beard describes him as a “naturally a cautious investor.”

"The primary driver for a stock to enter the [City of London] portfolio is dividend yield ... This focus on income ... has been paramount in the fund’s success,” said Beard in her latest research report. “Yield discipline helped the fund weather the financial crisis better than many; although it trailed the FTSE All-Share in 2009, it gave up a little less in 2008."

There are four other investment trusts that have been raising their dividends for the last 40+ years:

- Albany Investment Trust (ABNY)-
- Foreign & Colonial Investment Trust (FRCL)
- F&C Global Smaller Companies (FCS)
- Brunner Investment Trust (BUT)

Charles Luke, manager of Murray Income Trust (MUT), which has been raising dividends for nearly three decades, says: “We expect many companies to continue to deliver solid dividend growth in 2012. However, for some companies the realities of the global macro-economic environment will put pressure on earnings and consequently the dividends they pay. But in aggregate, payout ratios remain low compared to history so many companies are not over-distributing and strong balance sheets suggest that financial distress is unlikely - both of these factors provide reassurance for the outlook for dividends.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.