Investment Trusts Dodge the Dividend Crisis

Silver-rated City of London is the top dividend-paying investing trust in the first half of 2021

James Gard 17 August, 2021 | 9:04AM
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UK investment trust dividends have been much more resilient during the coronavirus era than those of FTSE companies, according to the latest research from Link. This year, trusts are expected to pay out at similar levels seen before the pandemic, while dividends from UK shares are still far short of pre-Covid 19 levels.

Investment trusts paid nearly £900 million in dividends in the first half of the 2021, according to the latest Link Dividend Snapshot, and are forecast to provide £1.8 billion in dividends this year, a touch lower than last year.

Dividends from trusts were actually higher in 2020 than in 2019, whereas overall dividends crashed by 44% last year to their lowest level since 2011. UK dividends are expected to be just shy of £80 billion this year, including specials, a long way off the £100 billion high reached before the pandemic. “The modest first-half decline from investment trusts is, however, barely a blip compared to the broader dividend wipe-out over the course of the pandemic-to-date,” Link says. While UK dividends crashed in 2020, recent announcements have been more positive: a raft of companies have raised or maintained their payouts, while banks are getting ready to restart their dividends after a year’s pause.

Investment Trust Dividends Since 2009

Invetment trust dividends chart

How can investment trusts maintain dividends even as they companies they invest in cancel or cut their payouts? Rules allow trusts to save up to 15% of their dividends as part of “revenue reserves”. Collectively, Link estimates that trusts came into the pandemic with a buffer of more than £2 billion, and this had fallen to £1.7 billion by the middle of this year. More than half of trusts used revenue reserves to maintain dividends, and Link expects this drawdown to continue at modest levels for the rest of the year.

Ian Stokes, managing director, corporate markets EMEA at Link Group says: “Investment trust dividends cannot defy gravity, but they do come with a very plump cushion. Not only do they keep cash in reserve, but they can also bank some of the big capital gains they have made over the last year and hand these out to shareholders too.”

As the above chart shows, UK equity income, global equity and regional trusts make up the lion’s share of payouts, with a much smaller contribution from sector trusts. The top payer in the period is Silver-rated City of London (CTY), which paid £41.4 million in dividends in the first six months of 2021, just above Murray International (MYI), which handed £39.2 million to shareholders in the period.

City of London is also a “dividend hero” as defined by the AIC because it has raised its dividend for more than 20 consecutive years; in fact, it has been increasing its payout since 1966, the year England won the World Cup. Alliance Trust (ATST), which also has an unbroken 54-year run of rising payouts, is number six in terms of total dividends of £23.1 million.

Investment Trusts Ranked by Payout

UK investment trust dividends table

City of London is managed by Job Curtis, who has been at the helm since 1991. Only Lowland Investment Company’s (LWI) James Henderson has a longer tenure in the investment trust world, having started in January, 1990. “Curtis is naturally a cautious, mildly contrarian investor. This has served shareholders well over the years,” says Morningstar analyst Robert Starkey. The trust’s share price has risen by nearly 27% over the year amid a rally in value and income-producing stocks but has yet to regain levels seen above 400p before the pandemic.

Over 10 years, City of London has produced annualised returns of nearly 9% (in share price terms). “The combination of an exceptionally experienced and long-tenured manager, consistent process, low fees, and a focus on dividend generation makes City of London Investment Trust a compelling option for investors seeking a core UK equity income option,” says Starkey. Top holdings include British American Tobacco (BATS), which was recently the subject of a Morningstar Minute video.

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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James Gard  is content editor for Morningstar.co.uk