The Association of Investment Companies (AIC) has published the latest list of its 19 dividend heroes, the investment companies which have consistently increased their dividends for 20 or more years in a row. Following 2020, where UK dividends fell 41% in response to the pandemic, resilient income has never been more important.
Six dividend hero investment companies have now increased dividends for 50 or more consecutive years. City of London, Bankers and Alliance Trust lead the way with 54 years of consecutive increases. Caledonia Investments (52), BMO Global Smaller Companies (50), and F&C Investment Trust (50) follow with F&C Investment Trust announcing its 50th annual increase last week.
A further five investment companies have increased dividends for more than 40 consecutive years and another four have raised dividends for more than 30 consecutive years.
Some investment trusts are increasing dividends this year
So far in 2021, seven dividend hero investment companies have announced another year of dividend increases. In addition to F&C Investment Trust this month (10 March), Alliance Trust announced its 54th increase on 4 March. In February Witan (46), Scottish American (47) and Brunner (49) announced further increases and JPMorgan Claverhouse (48) and Bankers (54) increased their dividends in January.
Scottish American was promoted from 41 to 47 years of annual dividend increases following additional historic dividend data being verified from previous annual reports.
Recent research from the AIC found that 85% of equity income-paying investment companies increased or maintained their dividends in 2020 compared to 23% of income-paying open-ended funds.
“Against the challenging backdrop of 2020 it’s encouraging to see that investment companies’ structural benefits came to the fore and delivered for investors,” Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said. “Investment companies’ ability to save up to 15% of their income each year to boost pay outs in difficult years is a huge income advantage. It has helped the dividend heroes achieve their remarkable track records of consistent dividend growth, with four stretching as far back as the 1960s.”
Most investment companies increased or maintained dividends during the pandemic
But this impressive income resilience isn’t just limited to the dividend heroes. Investment companies’ structural benefits helped 85% of equity income-paying investment companies increase or maintain their dividends in 2020 during the pandemic, compared to 23% of their open-ended counterparts. Despite investment companies’ impressive record, it’s important investors remember that dividends are never guaranteed.
Craig Baker, Chairman of the Alliance Trust Investment Committee and Global Chief Investment Officer of Willis Towers Watson, said: “Being a global investment trust, with global diversification across eight stock pickers, Alliance Trust has delivered resilient total returns through a period of unprecedented volatility. Despite a challenging backdrop for generating income caused by COVID, we have been able to increase our own dividends year-on-year since the 1960s, with an increase last year of 3%, making this our 54th consecutive annual increase and maintaining the AIC dividend hero status.”
The Alliance Trust portfolio comprises the ‘best ideas’ of the firm’s stock pickers, selected based on their attractive fundamentals and prospects, which drive company valuations over the long term. Baker says that allocating to a single manager’s concentrated portfolio can be a bumpy ride. Individually, the return paths of each of the stock pickers can be quite volatile and differ significantly from one another. However, blending their stock selections into a portfolio that is risk-managed in terms of style, sector and country exposures, and which is diversified across several complementary strategies, leads to a much smoother return path for investors.
Unlike open-ended funds, investment trusts are able to retain 15% of annual income for revenue reserves. This gives investment trusts the ability to bolster returns on rainy days.
Alliance Trust has one of the largest revenue reserves of any investment trust, totalling £99.2m which equates to over two years of dividend cover. And if shareholders and the court approve plans to convert the company’s £645.3m merger reserve into distributable reserves, it will have significant potential to support continued dividend growth for many years to come.