Divis fall 30pc but investors have a way out

Investors have been urged to reconsider how they invest for income as dividend cuts come thick and fast and expectations rise that payouts could fall by 30pc this year. Many businesses have slashed their divis, with more than £15bn wiped out. The biggest payers hit investors hardest. Miner Glencore has slashed its payout by £2.6bn while banks cancelled another £7.5bn. The housing sector withdrew nearly £1.5bn and retail darling M&S withheld more than £130m. Those who invest via British income funds will feel the pain as the effects filter through.

These investors should consider changing the way they approach income investing by shifting from funds to investment trusts.

Funds must pass on the dividends they receive, or lack thereof, but investment trusts follow different rules. In particular they can keep reserves to ensure they maintain dividends when the stocks in the portfolio cut theirs. A switch now would not even come at a cost, other than trading charges. This is because the share price for the average British income trust has fallen by 32pc in 2020, while the average loss on an equivalent fund is 30pc. Investors could therefore sell a fund and buy into a similar portfolio of stocks via a trust more cheaply – while getting a more resilient income.

On a £10,000 investment, the average British income fund paid out £536 in dividends in 2019, versus £515 from trusts. In 2020, funds will have to fully absorb the expected 30pc cut in dividends and income could fall to £375. But trusts could maintain the £515 payout as the average British income investment company has more than two years’ worth of dividend cover in reserve.

Ryan Hughes of AJ Bell, the fund shop, said: “Many trusts that focus on income have a decent income reserve and may be in a position to maintain their dividend this year despite the cuts that will come from companies.

“Given share price falls, this may be a small crumb of comfort. But, as many people rely on investment income, it will make a difference.”

Law Debenture investment trust holds the most reserves among British income trusts. The £730m portfolio is run by James Henderson, one of the longest-serving fund managers in Britain, and could cover its dividend for more than two years. It paid a dividend of 26p per share in 2019, which was more than covered by income of 30.7p per share. However, a 30pc fall would reduce the latter figure to 21.5p and the trust would need to dip into reserves to cover the 4.5p shortfall. But the gap could easily be

As payouts dwindle, income seekers must look to trusts. Jonathan Jones and Taha Lokhandwala report