Another Reason to Like Investment Trusts

Editor's Views: Trusts' ability to keep paying dividends through the pandemic has been a major bonus

Holly Black 20 August, 2021 | 10:25AM
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There are lots of reasons to like investment trusts, and their resilience through the Covid crisis is just one of them. Of course, investment trusts are just as vulnerable to share price plunges as any other stock, but as long as you’re not panic-selling during a market sell-off, that should be of little real concern. Their ability to keep paying dividends through the depths of a crisis, however, is a major attraction and something few listed companies managed over the past year.  

Some features of investment trusts are undoubtedly a bit complicated, but they can also be incredibly beneficial once you get your head round them. They are, for example, allowed to retain 15% of their annual income in so-called revenue reserves. Why are they holding on to income when they could be paying that out to shareholders? Well, it’s a bit like a country mouse and city mouse analogy – a trust could pay out all of the income it receives to investors and they’d enjoy a bumper dividend that year. Or they can squirrel some of it away for the winter (or the pandemic, in this case), so rather than having a big payout one year and nothing the next, investors get a smoothed and reliable dividend, even in difficult times.

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Holly Black  is Senior Editor, Morningstar.co.uk

 

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