Amid rising inflation, continued supply chain disruption and the possibility of higher interest rates, Chelverton UK Dividend Trust (LSE:SDV), an investment company focusing on mid to small-cap UK listed companies, has recently seen a widening discount. From 2.99% in June to just under 7% in November 2021.
Chelverton UK Dividend Trust (SDV), which has £68 million AUM, is no stranger to trading at some kind of discount, however. In the last 10 years the NAV total return has increased by 300.4% and the share price has increased by 315.5%, although in the last twelve months, the share price total return is 63% and NAV total return is 63.4%. Today the share price is 215p, up around 30 % YTD and up 14% from pre-pandemic levels (November 2019).
Has Brexit played a role in the discount?
Certainly, rising inflation – now coming in at 4.2% – and supply chain disruption post Covid-19 have to shoulder some blame for this, but the impact of Brexit is also to blame. In June this year, David Horner, Chelverton’s managing director stated that their investee companies were still suffering from a ‘Brexit discount’.
What is the Chelverton UK Dividend trust investing in?
While SDV is wholly focused on UK companies, it does not invest in FTSE 100 companies which means that the portfolio is reasonably diversified. It is currently invested in 74 companies spread across 16 sectors. Financial services (18.9%), industrial goods and services (15.5%) construction and materials (9.8%) and consumer products and services (8.4%) make up the main sectors.
Top holdings include: Belvoir Group (3.36%); Diversified Gas & Oil PLC (2.85%); Alumasc Group PLC (2.67%); UP Global Sourcing Holdings (2.52%) and Jarvis Securities PLC. It also holds just under 2% in both Polar Capital and Brewin Dolphin holdings. Horner and his team believe that since 2020, their investee companies are, in the main, emerging as better companies with more efficient processes. The portfolio is almost fully invested.
Is it all about the dividend?
Let’s not forget the most important thing about this investment company is the fact that it pays a consistently growing dividend – hence the name – and in periods of high inflation dividends, although never quite guaranteed, can provide a sustainable income. SDV has had a policy over the past eleven years of growing the annual dividend and retaining to revenue reserves the maximum permitted under the legislation.One of the unique benefits of investment trusts is that they can retain 15% of their income, and then in tough times, such as in 2020, they can use those revenue reserves to boost their dividends.
Including the special dividend, the total dividend for last year was 10.272p, a 7% increase on the 9.6p paid in 2020. And on 9 September, the Board announced the first of four interim dividends of 2.75p each making a total of 11p for the year ending 30 April 2022, amounting to a 7% increase on 2021.
At the current share price, the dividend yield is around 5%. This compares favourably to the City of London (4.89%) and Invesco Select UK Equity (3.42%) in the UK Equity Income sector, although Aberdeen Standard Equity Income’s dividend yield is currently 5.89%.
Time will tell whether these headwinds continue to impact Chelverton UK Dividend Trust, but it is worth bearing in mind that in June this year, the Board stated that it has sufficient revenue reserves to cover around two years’ worth of dividend payments.
