It looks like investment trusts are still worth a second look if you are on the hunt for dividend income. Latest analysis from Link Group has shown that investment trusts raised pay outs by 4.2% in 2020, shelling out a record £1.8bn to investors.
According to Link Group’s Investment Trusts Monitor, 77% of investment trusts actually raised pay outs during the April to December 2020 pandemic months. This at a time when many companies in the FTSE 350 suspended dividends (UK listed company dividends were down 38% in 2020).
Hefty reserves were key to dividends success
The success of the sector was partly attributable to hefty reserves of £1.8bn. Trusts that were sitting on these reserves could keep on paying dividends. Link estimates that this sum equaled the total of all dividends paid by investment trusts in 2018, and 90% of the total in 2019.
“For the full year 2020, more than four-fifths (85%) of equity income-paying investment companies increased or maintained their dividends to shareholders despite the impact of the pandemic,” noted Ian Sayers, CEO of the Association of Investment Companies. “In contrast, less than a quarter (23%) of equity income-paying open-ended funds increased their dividends in 2020 and none held dividends at the same level as 2019.”
Link estimated that by the end of March of this year investment trusts had burned through about £700m of their reserves. Global equity trusts had revenue reserves worth two years of dividends before the pandemic. UK trusts had about a year’s worth.
The global equity investment trust sector accounted for about a third of the dividend growth from all investment trusts. They raised dividends by 9.3% on average, which is staggering when you consider that global dividend pay outs dropped by 12.2% during the period. These trusts were sitting on hefty cash cushions going into the pandemic, worth roughly two years worth of dividends.
Investment trusts can use cash cushion to pay dividends
“As Link’s Investment Trust Dividend Snapshot highlights, investment companies have important income benefits,” the AIC’s Sayers added. “Investment companies can hold back dividends from investee companies in a revenue reserve and distribute these dividends to shareholders in tough times such as the pandemic.”
Investment trusts are allowed to hold back up to 15% of the dividends they earn each year from the companies in their portfolios.
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However, not all investment trusts were paying dividends. Link said that once the pandemic took hold, a quarter of UK equities investment trusts chose to cut dividends. Among regional investment trusts, it was emerging markets and Japanese equities that fared the best. Trusts that invest in Europe were less successful, and saw an 18% reduction in dividends overall.
“The more internationally diversified trusts are, the less they have been exposed to the steepest dividend cuts,” explained Susan Ring, CEO of Link Group UK. “Global trusts have big reserves and have seen a relatively small reduction in the dividends paid to them by the companies they hold. Continued dividend growth is likely this year from this group. Asia-Pacific and Japanese regional trusts are focused on parts of the world where the economic impact of the pandemic has been less severe so these too should hold relatively firm.”