UK Edition
The pain continues for income investors. The coronavirus pandemic has continued for longer than many had hoped at the beginning, and the effects on the economy have pushed further into the future the likelihood of a resumption of dividend payments from many listed businesses.
Investment trusts are different, as we have often pointed out: many have reserves that they can use to maintain their divis when the income they receive in dividends from their holdings falls short.
In May we looked at the extent to which these reserves might enable the “dividend hero” trusts – those with a 20-year-plus record of annual dividend increases – to retain that status.
But one interesting thing about the dividend heroes is that many are not obvious income trusts at all: one hero, for example, is Scottish Mortgage, about the most growth-focused portfolio one could imagine. Although it has indeed raised its dividend for more than 20 years, its yield is just 0.4pc and it’s hard to imagine that many investors hold it for its dividend record.
What then of trusts that do focus on income? How many “equity income” trusts will be able to maintain or raise their dividends this year amid the Covid mayhem, and how many will have to take the difficult decision to cut?
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The trust with the most illustrious dividend record of all is City of London and this week it lengthened that record to 54 years when it announced a fourth dividend for the financial year that ended last month.
The board said it would pay 4.75p to shareholders on the register on July 31. This will take the total for the financial year to 19p, or 2.2pc more than last year’s 18.6p.
This week’s announcement from City of London’s board made it clear that it had every intention to maintain its record of dividend increases in the current financial year too. It said: “For the year ending on June 30 2021, the board expects to pay ordinary dividends in excess of 19p per share, thereby increasing the dividend for a 55th consecutive year. This is likely to be funded from a combination of income received during the year and revenue reserves.”
Those reserves stood at 15.4p a share in June 2019, according to last year’s annual report. So the trust should, barring a further collapse in divis from the stocks it holds, be able to meet its ambition for another rise next year.
JP Morgan Claverhouse is the other “equity income” trust to have committed to a rise in the dividend this year. Aberdeen Standard Equity Income said in May that it too intended to raise the annual dividend, albeit by just 0.1p, although it would not confirm the decision until November.
Four trusts, BMO UK High Income, Merchants, Diverse Income and Law Debenture, have said they intend to “at least maintain” their dividends.*
Only one income trust, Troy Income & Growth, has so far indicated that it is likely to cut its dividend. Analysts at Stifel, the broker, said trusts that had appointed a new management firm, such as Edinburgh, or were in the process of doing so, such as Temple Bar and Perpetual Income & Growth, were “more vulnerable” to dividend cuts.
Stifel added that two trusts, Murray Income and Value & Income, “have not made any comments since the scale of the dividend crisis became apparent”.*
Iain Scouller from the broker said: “Given we are now in the second half of 2020, the striking thing is how few of the [income] trusts have made firm comments on their dividend intentions for their current financial year.”
Questor says: hold
Ticker: CTY
Share price at close: 330.5p
*These paragraphs have been amended to reflect the fact that Diverse Income and BMO Capital & Income have issued statements regarding their dividends, contrary to what this article said when first published. We apologise for the error
Investment trust news
Two of Britain’s most experienced and respected bond fund managers, Paul Read and Paul Causer of Invesco, have stepped back from the management of two trusts, Invesco Enhanced Income and City Merchants High Yield.
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