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Investment trusts: 10 great dividend growers

With experts recommending equity income funds as a way for investors to overcome choppy stock markets, we look at 10 investment trusts that have consistently increased their dividends over the past 45 years.

 

by Caelainn Barr on May 21, 2012 at 09:01

Investment trusts: 10 great dividend growers

Record low interest rates, poor gilt yields and turbulent markets have turned up the heat on the hunt for steady returns.

However, a group of investment trusts have managed to consistently increase their returns for more than 40 years. The accolade of the longest-rising dividend payer goes to City of London , Bankers and Alliance trust, which has managed to pay more every year for the past 45 years.

Simon Elliott, head of investment trust research at Winterflood Securities, says: ‘It doesn’t surprise me that funds have been able to give a decent increase over the last 10 years. But you’ve got to be careful, because you should have a view on whether the dividends were covered from current revenue or they are dipping into revenue reserves.

‘A number of investment trusts were hit, particularly those with bank exposure, so they were forced to use revenue reserves, which is a very legitimate advantage of the structure, but it’s something to bear in mind.’

The table shows you which investment trusts have achieved long-term growth in their dividends. It shows what the total amount the trusts have paid in dividends per share been since 2001 and what the increase in the dividend payment has been over that time. The columns on the right show what the total return has been when capital growth is combined with the dividend income. This is shown both in relation to the share price and the 'net asset value' (NAV) performance of the trust's investment portfolio. The table also shows whether the shares are currently trading at a premium (+) or discount (-). 

Investment Trust Sector Years dividend increased Total dividends paid 2001-2010 Dividend % increase 2001-2010 Current discount/premium Share price % total return NAV % total return
City of London Investment Trust UK Growth & Income 45 96.7p 68.80% +1.6% 83.45% 53.84%
Bankers Investment Trust Global Growth 45 90.51p 83.89% -10.0% 69.81% 70.65%
Alliance Trust Global Growth 45 73.66p 22.56% -15.6% 51.66% 44.46%
Caledonia Investments Global Growth 44 292.5p 47.08% -29.2% 168.39% -
Albany Investment Trust UK Growth & Income 42 84.75p 47.45% -17.1% 73.01% 64.19%
Foreign & Colonial Investment Trust Global Growth 41 50.25p 104.55% -10.7% 42.55% 41.15%
F&C Global Smaller Companies Global Growth 41 44.7p 26.58% +1.3% 152.11% 118.04%
Brunner Investment Trust Global Growth 40 95.8p 67.12% -16.8% 8.91% 12.92%
JPMorgan Claverhouse Investment Trust UK Growth 39 130.1p 105.88% -9.7% 23.96% 36.94%
Witan Investment Trust Global Growth 37 92.45p 37.11% -12.2% 37.44% 37.32%

City of London

The income growth trust is managed by Job Curtis and has given net asset value total returns of 53% over the past three years, beating the average sector NAV on a one- and five-year basis. The trust paid out 90.5p from 2001-2010 and is currently trading at a premium of 3.1%, compared with the sector average discount of 1.6%. Its top holdings are mainly in multinational FTSE-listed companies such as Royal Dutch Shell (RDSb.L) and British American Tobacco (BAT.L)

Bankers

The Bankers investment trust paid out 6.58p in 2001, a figure that rose by 84% to 12.1p in 2010. Alex Crooke oversees the trust and discussed his outlook and investing in financials with Citywire earlier this year. Less than 20% of the portfolio is invested in financials, but Crooke says despite the uncertain future for the banks in the UK, the sector is viewed too harshly.

However its NAV returns failed to beat the sector average over three and five years, as reflected in its 8.5% discount. Mick Gilligan, head of research at Killik & Co says: ‘We like the look of Bankers on a 10% discount and 3.1% yield. It is overweight industrials and technology – two sectors where we think earnings growth is lowly rated. It also holds 10% in Asia.’

Alliance

Alliance has endured pressure from hedge fund and activist shareholders Laxey Partners to increase its dividend and outsource management. Despite producing 45 years of increased dividends the trust’s current dividend yield of 2.9% falls short of inflation at 3.5% and its NAV total returns have underperformed the global growth sector average over three and five years.

Simon Elliott, head of investment trust research at Winterflood Securities, said: ‘If you look at Alliance Trust's shareholder base, there’s a lot of retail investors in there and they have a dividend that grows particularly when it can outpace inflation, it’s a very attractive part of the story. In saying that I think most investors look at the total returns and clearly dividends are part of that but also how you’re doing on the capital side of things is equally important if not more.

‘I think the interesting thing with the Alliance trust is that the they’re yielding at the moment 2.9% based on their current share price so that’s just looking at their dividend over the last year.  Which is a reasonable yield but at the same time it’s below the market. But one of the things that Laxey suggested with Alliance trust is that they look to increase that dividend and Alliance trust in their AGM statement said they would look at their dividend.’

Caledonia

The trust was acquired by the shipping dynasty Cayzer family in 1951 and listed on the stock exchange in 1981. It’s trading at a wide 29.2% discount, the biggest in the global growth investment trust sector, as its net asset value has consistently underperformed the sector average over the past one-, three- and five-year periods.

A quarter of the portfolio is invested in unquoted companies along with property and other funds. Management decided to concentrate the portfolio's holdings from 68 to 40-50 in 2011, which could lead to a re-rating of the trust.

Albany

Albany is trading at a 17.1% discount, wide of the UK Growth sector average of 12.3%, as a result of the underperformance of its NAV total returns over a three- and five-year period.

The trust has increased its dividend for the past 42 years and paid out 10.2p in 2011, with a dividend yield of 4.2%. However, Albany’s net revenues after tax fell from £910,000 to £769,000 and the trust used over £200,000 from its revenue reserves to finance the dividend increase.

Foreign & Colonial

The trust’s dividend has risen consistently over the past 41 years and increased its payouts from 2001 to 2010 by 105%. But the dividend for 2011 stood at 7.1p, meaning its current dividend yield of 2.36% lags inflation.

However, the trust, which invests in equities and private equity trusts, is focused on growth rather than income. The trust is currently trading at a 10.7% premium and has given a total return of 37% on its net asset value over the past three years.

F&C Global Smaller Companies

Foreign & Colonial’s Global Smaller Companies  trust has also given consistent increased dividends over the past 41 years, and boosted its payments by 26.6% over the past 10 years.

The trust is run by Peter Ewins, who discussed his investment approach with Citywire earlier this year and explained that the trust has built up dividend income, with three years equivalent of revenue reserves, and can dip into the savings if the trust hits a bumpy year.  

Mick Gilligan, head of research at Killik & Co, comments: ‘F&C Global Smaller Companies is one we would buy if it moved closer to a 5% discount (the level the board aims to defend) but trading around NAV currently doesn’t leave enough protection against a hike in risk aversion.’

Brunner

The trust has increased its dividends for 40 years, with an 67% increase between 2011 and 2010. Brunners’ yield outperforms the Global Growth sector average at 3.3% and paid a dividend of 12.2p in 2011.

However, the trust is trading at a 16.8% discount whilst its NAV total returns have underperformed the Global Growth average over a three- and five-year period. The trust’s top holdings are in UK treasuries and blue-chip equities GlaxoSmithKline (GSK.L) and Royal Dutch Shell (RDSb.L).

JP Morgan Claverhouse

Over the past 10 years the most impressive increase in dividends among the steady earners came from the JPMorgan Claverhouse Investment trust. Its dividend payment rose 106% from 2001 to 2010, increasing from 8.5p to 17.5p. The trust invests in FTSE 100 companies with top holdings in index heavyweights Royal Dutch Shell (RDSb.L) and BP (BP.L) and has a robust dividend yield of 4.7%. However the trust’s NAV total returns have underperformed on a one, three and five year basis as reflected in its 9.7% discount.

Elliott adds: ‘I think dividend stocks are very important and people have got a yield requirement at the moment. But I think you’ve got to look at total return and in the case of Claverhouse, you’ve got to look a little bit wider than just what the fund is yielding.

‘There has been a bit of a shuffle round of the management team and that I think reflects this difficult period of performance, but certainly from a yield point of view it’s attractive. The chairman basically said in March the net asset value per share has underperformed its benchmark for four years out of the last five.’

Witan

With a large concentration in financials W itan’s NAV and share price performance lagged behind its benchmark from the 2008 financial crisis until the start of 2011. It invests in equities, funds and bonds with its top holdings in 3i and Electra Private Equity trusts. 

The trust has increased its dividends for the past 37 years despite its NAV total returns of 3% over a five-year period, underperforming the global growth sector average of 5%. It paid out a dividend of 11.95p in 2011 and has a current dividend yield of 2.7%.

10 comments so far. Why not have your say?

JohnW

May 21, 2012 at 15:20

I would have thought Lowland would have been worth a mention here, as would Temple Bar.

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William Phillips

May 21, 2012 at 16:09

It beggars belief that hacks go on swallowing and re-emitting the Association of Investment Companies spin about ever-rising dividends.

It is dead easy for an investment trust with a modicum of earnings cover and a few months' revenue reserves to go on knocking out small increases in nominal terms, while the actual purchasing power of the payout shrinks and shrinks.

Moreover, if you buy a trust on a substandard starting yield, even real growth may never give you as good a return over time as you could get from a cash deposit account-- at least, if base rate was fixed at a level to stop the thrifty starving. Witan on 2.7% is a case in point.

To call Alliance a good place for savings, when the real worth of its dividend is lower than in 1999, is only one example of how the 'money illusion' can lead one astray. ATST's existing long-term holders know better.

In any case, the new power to distribute realised capital gains dwarfs the ability to raise revenue payments as a bull point for ITs. Perhaps Citywire will catch up with that some time before 2020.

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Keith Cobby

May 21, 2012 at 17:34

The starting point should be total return and only then dividend yield because there may otherwise be the danger of turning capital into income.I do not think the majority of mainstream trusts will take the opportunity to distribute capital gains.

The criticism of trusts only raising dividends by nominal amounts may be correct for periods of time, but many of the trusts mentioned have produced dividend increases above the rate of inflation.

What other class of investment offers anything like the steady long term income production from trusts. Not OEICs, unit trusts, fixed income or cash deposits.

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gggggg hjhjkl;'

May 21, 2012 at 17:50

A real load of "donkeys" here, there are much better IT dividend candidates out there!! Murray for instance.

45 years of mediocre divdends is 45 years of mediocre divdends, however you spin it.

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ynys

May 21, 2012 at 22:02

Whether being able to retain some dividend rather than distribute it all, is an advantage is debatable. The larger trusts do tend to have lower amc / ter costs than open ended funds but on the other hand there is generally a share purchase and ISA management fee and probably less variety. I wouldn't say there is an easy answer to what is the best type of fund or platform.

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John Osborne

May 22, 2012 at 11:53

The NAV Total return figures above give a misleading view of the performance, because the capital performance relative to inflation, irrespective of the income, is hidden. Also the yields are not shown, and as pointed out above, many of the best income growth ITs are missing from the table.

Keeping the NAV capital, income, and income growth, figures separate gives a more accurate picture of return for savers.

Any medocre income manager (several above) of a large IT can dump half the portfolio into FTSE index lowest quality highest yielders, have a share buyback policy and then generate good total return figures.

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satish mittal

May 27, 2012 at 21:49

I do not think that CW has been unpartial in recommending there ITs. The author should explain why these are the better choices over others such as Murrey., after all it is the total return which is important. To ignore total return and push the fund only on the basis of dividend growth would be misleading particularly those readers who are not professional such as myself.

Satish

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William Phillips

May 27, 2012 at 23:06

"after all it is the total return which is important."

If you are a saver who seeks a better running return than you can get from a deposit account or bond, dividends are what matter-- not the undistributable and often unrealised capital gain element in 'total return', which is only a boiling-together of intrinsically different types of result for marketing purposes.

Dividends are real cash in hand which the trust cannot claw back; capital profits can melt away tomorrow.

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Bob saxton

May 28, 2012 at 14:22

I found this article very useful when taken in total with the comments.

I realised the difficulty in choosing investments but feel I am in a slightly better position to judge now

Bob the electrician

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JohnW

May 28, 2012 at 15:15

I dont think you would do badly in the long term with any of the selections. Personally I like City of London, Lowlands and Temple Bar, but when you look at the companies held by those trusts they are pretty much invested in the same thing. So having money in all three is not a lot different to having all your eggs in one basket. But then, when looking at income trusts I think that applies to most. But differing gearing and different percentages can make quite a difference to the overall performance.

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