UK Edition
Questor: This income stalwart offers a 4pc yield and a 20-year record of rising dividends
The end of this year also marks the completion of the first quarter in the life of our income portfolio. And what a time it has been to start investing.
Donald Trump’s election has caused the biggest change of mood in the financial markets since the credit crisis.
Worries about deflation and low interest rates and investment returns have been replaced by hopes of “reflation”, normalised rates , and better economic growth.
One consequence has been a sudden preference for “value” stocks over defensive businesses and last week we reflected this shift by adding Lloyds Banking Group.
Our portfolio aims for a yield of 5pc from a £500,000 pot. You can see where we are today in the table (below).
We’d like to hear your feedback on our choices; our contact details are below. A 5pc yield was always an ambitious target in a world of low rates but we also set ourselves the challenge of increasing the portfolio income over time to keep pace with inflation. Ideally its capital value will rise too.
With these goals in mind, this week we look at an investment that has a current yield of 4pc, an excellent record of dividend increases and plenty of scope for capital value increases.
Schroder Income Growth is an investment trust that currently offers a decent discount to the value of its assets.
The mere existence of a discount is not sufficient reason to buy a particular trust, of course, but they do offer an immediate boost to the yield relative to buying the same underlying assets at their market value.
Questor will be investing £25,000, or 5pc of our portfolio, in Schroder Income Growth. Admittedly the yield is below our target but the 9pc discount – meaning £195m of assets are trading at just over £180m – is too steep to ignore.
We also believe that the discount is likely to narrow given the long-term track record of the manager, Sue Noffke, while the fund’s move into the oil giants BP and Shell is likely to prove a fillip if the recent deal announced by Opec leads to higher oil prices.
The fund has the added bonus of a proven record of steadily increasing dividends. It is one of the so-called “dividend heroes” – trusts that have increased payouts to shareholders every year for at least 20 years. It pays dividends quarterly, adding to its appeal as a staple income provider.
Two other features employed by the trust are also worth mentioning. Firstly, it has used its ability to borrow to boost returns. Such gearing also amplifies any losses but the level here – 7pc – and the conventional nature of the loans involved mean there is no cause for alarm.
Readers might wonder why Questor is buying another investment company focused on British stocks when the Invesco Income Growth trust makes up 10pc of the portfolio.
Yes, there will be some duplication of stocks. However, Schroder is focused more on the FTSE 100 giants, in particular oil and gas, while Invesco favours slightly smaller companies and utilities firms.
Combined, they form a strong core for the portfolio, which after this addition still has around 30pc left to invest. One sticking point of the Schroder fund is cost.
“Ongoing” charges of 1pc are acceptable but higher than on comparable funds. This will have to be kept under review alongside returns.
Questor says: Buy
Ticker: SCF
Questor archive: telegraph.co.uk/questor
Contact us: questor@telegraph.co.uk