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Dividend Heroes in waiting: the next generation of income powerhouses

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In this week’s Investment Trust focus, The Armchair Trader is going to focus upon not just one fund, but a group of funds.

Although many investors look at capital returns primarily, the provision of income, especially as the cost-of-living crisis continues to bite into a household’s budget, is becoming increasingly important. Investment Trusts may be the best option when seeking out a portfolio that will provide a steady stream of dividends, in that they have a distinct advantage over open-ended investment funds by nature of the fact that they can retain income from their portfolios.

This means that investment trusts can save for a rainy day and pay out dividends even when other companies are coming under pressure. Investment trusts are allowed to hold back up to 15% in a revenue reserve that can then be utilised in in lean times boosting dividends when others are squeezing theirs.

This has seen Investment Trusts become the number one choice over open-ended funds in terms of income provision. Many Investment Trust managers have used this mechanism and the Association of Investment Companies (AIC) has handily arranged the funds that pay dividends come rain or shine in a list it has named the ‘Dividend Heroes’.

To get on the list, an investment trust must have consistently increased their dividends for 20 or more years in a row, which is no mean feat, but some investment trusts can count their years in centuries, not decades.

Top of the list is City of London Investment Trust [LON:CTY] a GBP2.3bn fund managed by Janus Henderson that can trace its origin back to 1891. City of London, which is in the AIC’s UK Equity Income sector has been paying dividends consistently for 57-years. In a year when football takes centre stage, it’s worth noting that City of London has been paying dividends year-on-year since Bobby Moore lifted the World Cup in 1966.

The area we’re going to focus on in this article is the group of investment companies that is about to break through into the premier league, and are grouped currently in the AIC’s Next Generation of Dividend Heroes.

The NextGen are investment trusts that have increased their dividends for ten or more years in a row but fewer than 20. The list includes some of the newer fund management groups.

Artemis Alpha Trust

First up is the Artemis Alpha Trust [LON:ATS], part of the Artemis Fund Management group, an investment management house founded in 1997 which now manages about GBP25bn of assets.

Artemis Alpha is top of the NextGen table, having a track record of paying out dividends for 19-years and has assets under management (AUM) of about GBP140m and is part of the AIC’s UK All Companies Sector. Over five years it’s top performer in sector, with a (share price total) return of 46.6% to 10th June. Over one-year it comes third in sector, with a 19.1% return

Managed by Kartik Kumar and John Dodd the fund has a dividend yield of 1.67% and five-year dividend growth of 5.03% per annum

Murray Income Trust

Also on 19-years is the GBP1.8bn Murray Income Trust [LON:MUT] which aims to achieve an above average dividend yield, with long term growth in dividends and capital ahead of inflation, by investing principally in global equities.

In the abrdn stable, the fund is managed by a team of Bruce Stout, Martin Connaghan and Samantha Fitzpatrick and resides in the AIC Global Equity Income sector, a smallish sector of seven funds. This fund pays dividends quarterly and has five-year dividend growth of 2.23% p.a., a bit middling in its sector where the average is 5.28% p.a. It needs three managers to run the fund as it boasts an AUM of GBP1.8bn

Stout wrote recently: “With close to 40% of the world’s population voting in elections this year, the legitimacy of outcomes will be scrutinised like never before. Global financial markets may need strong stomachs to negotiate the months ahead, but as always attractive investment opportunities will arise. They always do. With greater depth and diversification throughout global equity markets than ever before, the investment landscape provides numerous options to reduce risk and potentially increase returns unimaginable to would-be-investors fifty years ago.”

BlackRock Greater Europe

BlackRock Greater Europe [LON:BRGE] is third in the NextGen charts, with a dividend payout history of 17-years. With AUM of GBP730m, it is the second largest fund in the AIC Europe sector. It has a broad mandate, able to invest in companies that are large-, mid- and small-cap, primarily in developed European markets, but does on occasion dabble on the fringes of Europe.

Paying dividends semi-annually, the fund has five-year dividend growth of 3.26% p.a., in the bottom half of its sector. The last dividend announced was 1.75 and although a NextGen dividend hero, is targeting capital growth, which over ten-years has been 191%. The fund hasn’t done badly over five-years either with a return of 82%

Manager, Stefan Gries said: “We remain fairly constructive on European equities as the set-up should be positive: inflation is on a downwards trajectory and the economy appears relatively robust, Eurozone inflation figures have fallen and, whilst there may be volatility in month-to-month data, the economy can handle these levels of inflation.”

Schroder Oriental Income

Our last two funds are from the AIC’s Asia Pacific Equity Income sector. Schroder Oriental Income [LON:SOI] has a track record of 17-years of consistent dividend payout. The Armchair Trader recently wrote about the GBP736m fund which has a dividend yield of 4.37% and pays quarterly.

The fund has five-year dividend growth of 4% p.a. and is run by Richard Sennitt, who joined Schroders as an Asian equity investment manager in 1993. The Schroder Oriental Income fund is the best performing in sector over one-year to 10th June (on a share price total return basis), returning +9.96% against a sector average of +6.72%.

Sennitt argues Asian companies are increasingly world-leading and returning cash to shareholders. The Schroder Oriental Income Fund aims to tap into the Asian income story and help investors diversify their dividends.

Henderson Far East Income

Sat Dura, manager of the GBP400m Henderson Far East Income fund [LON:HFEL] would be inclined to agree with Sennitt, as take on Asian Pacific Equity Income takes fifth place on the AIC’s NextGen list with a 16-year record. The fund aims to provide shareholders with a growing total annual dividend per share, as well as capital appreciation, from a diversified portfolio of investments from the Asia Pacific region.

The fund has five-year dividend growth of 2.3% p.a. and a dividend yield of 10.28%, paying dividends quarterly.

Joanne Collins, an analyst for Edison Research wrote in an April research note: “Henderson Far East Income has consistently delivered on its objective to provide a rising dividend. However, like many investors, HFEL’s managers overestimated the potential for a post-pandemic rebound in China. The trust’s resultant overweight to Chinese consumer and other cyclicals led to a fall in portfolio revenues and underperformance in the financial year ended 31 August 2023.”


Collins added: “HFEL’s board has since indicated an increased willingness to use reserves when necessary to support dividend payments, which it did in FY23. This reduces the requirement to focus primarily on high income names to fund dividend payments, giving lead manager, Sat Duhra scope to move into other areas of the market where he can acquire well-priced value names offering performance and yield, or the prospect of dividend growth over time.”

Dividend-paying funds offer a number of benefits to investors, providing a regular income stream, with dividends a good weathervane of the underlying investee companies’ financial health. Dividend-paying funds importantly offer protection in uncertain or falling markets – which we have seen plenty of over the past few years – providing a safety net when market valuations are dropping through the trapdoor.

When you are on top, it’s hard to stay on top, although it’s likely the funds at the top of the tree, with records of over 50-years of rising dividend payouts will likely continue in the same form, the NextGen list is an indicator of the hungry managers who are looking to creating a record that spans decades.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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