3 Dividend Hero Investment Trusts

VIDEO: Dividend hero investment trusts have grown their income pay outs for at least 20 years and some have managed 54 years of rising dividends, says the AIC's Annabel Brodie-Smith

Holly Black 14 April, 2021 | 11:00AM
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Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Annabel Brodie-Smith from the Association of Investment Companies. Hello.

Annabel Brodie-Smith: Hello, Holly.

Black: So, we're talking all things income investing, and you guys have something called a dividend hero which you monitor. What is a dividend hero?

Brodie-Smith: Well, a dividend hero is an investment company that has increased its dividend every year consecutively for more than 20 years. We have 19 dividend heroes in total and they can do this because they've got some unique structural benefits, namely, investment companies can retain up to 15% of the income they receive from their investee companies, they store it in their revenue reserve and then when times are tough, and times definitely were very tough for income investors last year, in the U.K., dividends down 41% on 2019 according to the Janus Henderson Dividend Index. When times are tough, they can use those revenue reserves to boost their dividends. So, that's why they have this great long track record of increasing their dividends.

Black: So, this maintaining or growing a dividend for 20 years, that really is the income Holy Grail. And why is it that you think dividend growth is so important rather than just paying out the same level each year?

Brodie-Smith: Yeah. Well, dividend growth is important to investors. Some investors are using the dividends they receive to help them pay for their living expenses. Now, I think we're all very aware that living expenses have a tendency to go up. So, therefore, it's related to inflation. We've been in a very low interest rates and low inflation period for a while now, but there has been some concern about inflation increasing. And therefore, you need a growing dividend to counter that inflation. It's also – a growing dividend is a sign of a healthy company. And on your initial investment as your yield increases and the dividend grows year-on-year, you can get a very, very healthy and generous yield. But it is important that I emphasize that dividends are never guaranteed, and that's something that's very important for investors to take on board.

Black: So, there are 19 dividend heroes in your list. Do you want to talk us through a couple of those?

Brodie-Smith: I'd love to, Holly. I'm going to start off with the City of London Investment Trust (CTY), which has the longest track record of dividend increases, 54 years. It's been increasing its dividends since 1966. And to put that in some sort of context, that was the year that Sergeant Pepper launched its Lonely Hearts Club album, so a very long time, managed by an incredibly experienced manager, Job Curtis. He's been at the helm for nearly 30 years and it's in the U.K. equity income sector. It has a 5% yield, a considerable yield. Now, the U.K. has been out of favor. We've had Brexit and the pandemic. But we've seen it bounce back and hopefully we're seeing more recovery this year.

Then, I'd like to talk about Alliance Trust (ATST), again 54 years of dividend increases. Now, this is managed by Willis Towers Watson and it's a little bit special this company because Willis Towers Watson chooses the best managers to manage up to 20 companies in the portfolios and they have a number of these managers in place. So, you have very diversified global portfolio over different countries and different sectors. It has a 1.5% yield, so much lower than the City of London, but you're getting that global portfolio and that growth.

Then I want to talk about Bankers (BNKR). Now, the lead manager here is Alex Crooke. Now, Bankers, the name, it's been around since 1888 and the name comes because when they established the company, 7 out of the 9 original directors were bankers. Now, Bankers has a 2% yield, global portfolio and again, 54 years of dividend increases, really quite a record.

Black: It really is. Annabel, thank you so much for your time. For Morningstar, I'm Holly Black.

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.

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Holly Black  is Senior Editor, Morningstar.co.uk