Dividend hero investment trusts show inflation-beating qualities – AIC

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The group of investment trusts known as ‘dividend heros’ have grown their dividends well ahead of inflation over the past five years, according to new data.

Out of the 18 dividend heroes, which are those companies that have increased their payouts for at least 20 years in a row, 17 have delivered compound annual dividend growth ahead of the UK consumer prices index (CPI) over five years, according to the Association of Investment Companies (AIC).

The annualised rate of CPI in the five years to April 2021 was 1.8%.

There has also been inflation-beating income generation from many other potential future dividend heroes, with 22 trusts having grown dividends for ten or more consecutive years and delivered five-year dividend growth ahead of UK CPI, the AIC data also showed.

Among investment trusts listed in the equity income sectors, all five of Asia Pacific equity income trusts beat inflation over five years, as did six out of seven global equity income trusts and 18 out of 22 trusts in the UK equity income sector.

Unlike open-ended funds, investment trusts are able to stash 15% of annual income for revenue reserves, which gives them some dry powder to reinforce returns in more difficult years for dividends, allowing trusts to continue to maintain or increase its dividend.

So while the City of London Investment Trust, for example, aims to be predominantly invested in cash-generative companies which can consistently grow their dividends, the pandemic and national lockdowns caused significant disruption to dividends, said fund manager Job Curtis.

But the trust, like many of its peers, was able use its revenue reserves to increase its dividend.

“This was the 8th year out of 29 that City of London has drawn down revenue reserves; during the other 21 years the revenue reserve has been added to,” Curtis said. “In general though, the outlook for dividends is improving given the reopening of the UK and overseas economies and strong economic growth.”

Bruce Stout, investment manager of Murray International Trust, called inflation “the silent assassin of wealth”.

“Whilst sharp equity market declines and violent bouts of evaporating investor confidence may grab the news headlines and be recognised as instantaneous perpetrators of capital loss, the covert decay of spending power through prices rising faster than incomes seldom attracts much attention. And why should it? For the current investment generation brought up on a diet of debt, deflation and digital disruption, inflation arguably remains an alien concept,” Stout said.

“Confined to the history books alongside the dodo, mammoth and other extinct species, such belief not only appeared logical but also essential. How else could the current extended valuations of so-called growth assets, that thrive in deflationary circumstances, be justified?

“Yet contrary to expectations and inherent prejudice, global inflation appears to be alive and well,” added Stout. “As the world emerges from the global COVID pandemic, failure of global supply chains to keep up with extraordinary pent-up demand has fanned the flames of inflation once again.”

For income focused investors relying on real dividend growth to pay for the rising cost of living, Stout said these are increasingly anxious times.

But he said globally diversified investment trusts focusing on delivering sustainable income growth from the underlying portfolio of investments offer “an increasingly attractive option under such circumstances”, with their lack of geographical confines, sector restraints, asset class constrictions or benchmark obsessions meaning such trusts “can invest anywhere to focus on companies truly committed to increasing dividend payouts and long-term wealth creation for shareholders”.

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