Trust dividends wobble but top payouts still on offer

‘City of London will use reserves to keep up its 55-year dividend record’

Investment trust dividends have fallen for the first time in a decade, but investors who buy the shares of the brightest prospects can still secure high and growing payouts.

Dividends from trusts that invest in shares fell by 3.1pc in the first six months of 2021 compared with the same period last year – the first fall since the second half of 2010.

Three in 10 trusts cut their dividend, by an average of 23pc, according to Link Group, a data firm. Those that invest in British dividend- paying stocks accounted for the bulk of the falls.

They included the £720m Temple Bar trust, which cut its dividend for the first time in more than half a century last year. The 38.5p-a-share payout was 25pc lower than in 2019.

The £250m Troy Income & Growth trust is paying out 1.96p per share this year, down by 29pc on last year, while the £1bn Edinburgh Investment Trust, which held its annual dividend at 28.65p a share, has warned that next year’s payout will fall to 24p.

But income seekers can still find high and growing payouts. Ewan Lovett-Turner of Numis, the stockbroker, pointed to JPMorgan Claverhouse and City of London, two trusts that invest in London-listed dividend-paying stocks and avoided cuts, despite dividend reductions among the companies they own.

“City of London has managed 55 years of dividend growth and Claverhouse 48 years. They both have diversified portfolios and excellent fund managers,” he said.

City of London’s last quarterly payout for its 2021 financial year will be made at the end of this month and will bring the annual dividend to 19.1p per share, up from last year’s 19p, putting the shares on a 4.8pc yield.

The trust’s 83 holdings are mostly big blue- chip members of the FTSE 100 index. Top positions include British American Tobacco, the cigarette company; Diageo, the drinks business; Rio Tinto, the miner; and Unilever, the consumer goods giant.

Mick Gilligan of Killik & Co, a wealth manager, said City of London was the “gold standard” for income trusts because its board put income at the core of its strategy.

He highlighted the reserves the trust could draw on to supplement the dividends it received.

Trusts are allowed to hold back 15pc of the income they receive from stocks each year to boost dividend payments in lean periods, and they can also use profits from selling shares at a higher price than they paid for them.

“City of London has plenty of revenue reserves and would dip into capital reserves to keep up its record,” Mr Gilligan said.

JPMorgan Claverhouse also boasted healthy reserves, Mr Lovett-Turner said. The trust paid out 29.5p per share last year, up from 29p in 2019, and has announced 7p dividends for its first three quarterly payouts in 2021, up from 6.5p last year. The shares trade on a 4pc yield, based on the dividend last year.

“Claverhouse’s board wants to increase dividends ahead of inflation every year and has the reserves to deliver on this, while City of London has an even longer record of commitment to increasing payouts,” Mr LovettTurner said.

He added that some of the trusts that had cut their dividend still represented strong investments as they could now grow payouts from a smaller base. He highlighted Troy Income & Growth. This year’s 1.96p dividend put the shares on a 2.5pc yield, lower than that of rival income trusts, but a switch in investment style should lead to growing payouts from the shares it invests in.

“The cut was flagged before Covid hit, so should not have come as a surprise to investors,” Mr Lovett-Turner said. “It has shifted away from buying high-yielding stocks to companies that have lower yields but can grow dividends sustainably. This has meant switching out of utilities in favour of stocks such as Unilever and Experian, the credit data group.”

Mr Gilligan added that prospects for the Edinburgh trust were improving after a change in manager from Invesco’s Mark Barnett to James de Uphaugh and Christopher Field of Majedie Asset Management. “It was blighted by expensive debt it took out when interest rates were high, but it pays this all off next year. It also has a new manager, Majedie, which took over from Invesco, which could help close its 9pc discount,” he said.

Shares in the fund trade on a 4pc yield, based on next year’s 24p annual dividend, but the trust’s board has said it expects payouts to “grow progressively in future years”.

Link Group said the fall in investment trust dividends should be seen in the context of the slump in payouts from the stock market last year as the pandemic struck. Dividends across the globe have fallen by 6pc while payouts from British stocks are down by 35pc.

Despite this, trust dividends have risen by 2pc on average since the start of 2020.