Categories: Economy

Is it time to invest in one of these dividend hero trusts?

Since some savings rates are close to 5 percent, more potential investors may be tempted to park their money there instead of in the stock market.

But with inflation continuing to ramp up, there’s good reason to consider adding dividend-paying investments to your portfolio, as they can provide the opportunity for both reliable and rising income and capital appreciation.

Of the options available to investors, investment trusts are often considered to be among the best, as they offer more flexibility than funds over payments – making them particularly attractive to both those seeking to earn income or reinvest as compound dividends.

Some mutual funds have managed to increase their dividend every year for more than 20 years in a row

Unlike open-ended funds, trusts do not have to pay out all the dividend income they receive from their portfolios each year. Instead, they can withhold up to 15 percent of their investment and use it to supplement income in years to come.

This has helped a selection weather the stock market and economic storms and continue to increase their payouts to investors year after year.

Some mutual funds, which the Association of Companies (AIC) calls dividend heroes, have managed to increase their dividend every year for more than 20 years in a row.

However, the list of these dividend heroes is diverse and not all of them are ideal for income investors. Global growth confidence Scottish Mortgage, for example, made the cut with 40 years of consecutive increases, despite a return of only 0.48 percent.

Our experts picked their best investment companies from the AIC’s Dividend Heroes and Next Generation Dividend Heroes lists for those seeking reliable income, plus a trio of trusts that aren’t on the hero tables, but are worth checking out.

Trust alliance

Alliance Trust has been driving dividend increases for more than 50 years in a row and is one of the AIC’s Dividend Heroes.

The trust invests in global equities and has 190 stocks in its portfolio. Alliance Trust has lost 6 percent in the past year, but is doing much better than the global AIC sector, which has bounced back -32.5 percent. Over five years, confidence has returned 43.2 percent.

John Moore, senior investment manager at RBC Brewin Dolphin said: ‘This is a more run-of-the-mill trust that offers a decent level of income, but also the prospect of some capital appreciation. It currently returns just under 2 percent and includes Google owner Alphabet, Microsoft, Visa and Berkshire Hathaway among the top spots.

“With quarterly dividends, the assets are relatively all-weather, a fact reflected in the relatively stable share price, while others have been sold in a more meaningful way. The current discount to NAV is about 5 percent.’

City of London Investment Trust

City of London Investment Trust is unmatched when it comes to payouts and has increased its dividend for 56 consecutive years.

The trust has been managed by Job Curtis since 1991 and aims to achieve growth in income and capital by investing in a portfolio of equity securities, primarily listed on the London Stock Exchange.

Top positions include major FTSE hitters such as British American Tobacco and Shell.

Mick Gilligan, partner at Killik & Co said: ‘The investment approach looks for good companies that are well positioned to grow profits and therefore dividends over the longer term. At least 80 percent of the portfolio is invested in UK listed companies.

“The portfolio has a preference for large capitals, consistently higher returns than the UK market, higher quality (ie stronger profitability and lower financial leverage) and more value bias (ie preference for stocks with lower valuations).”

It currently has income reserves equal to 48 percent of the current year’s dividend and capital reserves equal to 3.7 times the current year’s dividend payment. It currently offers a 5.13 percent dividend yield and a 2.11 percent premium to net asset value.

Over the past year, the share price’s total return of 4.4 percent outperformed the broader UK Equity Income AIC sector, which lost 4.4 percent. Over three years, it has a return of 9.1 percent compared to 7.9 percent of the broader sector.

Murray International

Murray International is one of the Next Generation Dividend Heroes of the AIC, which defines it as investment trusts that have increased their dividends for at least 10 years in a row.

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Murray International, which is managed by Bruce Stout of abrdn’s global equity team, has increased its dividend for 17 consecutive years.

Managers invest in both developed and emerging equity markets, as well as global bond markets. The portfolio is currently based on emerging markets with 27 percent in Asian stocks and 13 percent in Latin American stocks.

Mick Gilligan says that like the City of London Investment Trust, Murray International has a value base that generally does well during periods of higher inflation.

Murray International’s major holdings include tobacco company Philip Morris, Unilever and Taiwan Semiconductor Manufacturing.

[‘Both City of London and Murray] offer returns in excess of 4.5 percent, have healthy reserves to supplement any revenue declines in the coming years, and have independent boards committed to continuing the progressive dividend policy,” said Gilligan.

Jason Hollands, managing director of Bestinvest said: “Murray International’s large-cap, value strategy is also starting to work well after a few years in the wilderness. It has recently benefited from relatively low exposure to the US compared to the index.’

The trust is currently yielding 4.46 percent and is discounting 2.91 percent from the NAV.

GCP infrastructure

James Carthew, head of investment firms at QuotedData highlights GCP Infrastructure as a revenue trust beyond the usual suspects.

The trust, which is managed by Philip Kent, invests in UK infrastructure projects with long-term government-backed revenues.

It is yielding 7.25 percent and is currently trading at a 14.83 percent discount to its net asset value.

“In NAV terms, GCP Infrastructure was the best performing fund in the infrastructure sector, helped by its positive exposure to higher UK inflation and power prices. However, this fund is more about its long-term sustainable income than capital growth,” said Carthew.

“The manager invests cautiously and structures investments in infrastructure projects with long-term, government-backed, availability-based income such as loans, which offer more downside protection than a comparable equity exposure.

Shares of GCP Infrastructure tend to trade at a premium – the current discount is therefore abnormal, but likely reflects the market’s heightened fears. There will be more clarity about British government policy and that should calm the nerves, we think.’

Temple Bar Investment Trust

Temple Bar Investment Trust, managed by Ian Lane and Nick Purves, is one of Jason Hollands’ main sources of income.

Its preference for value means it has outperformed the UK Equity Income AIC sector over the past year, returning 1.6 percent, while the broader sector lost 4.4 percent.

Temple Bar focuses primarily on the UK stock market, but with a quarter of its portfolio overseas. It has significant exposure to energy and financial services, with significant holdings in BP, Shell, Standard Chartered and Natwest.

It currently trades at a discount of 5.78 percent and has a 12-month dividend yield of 3.83 percent.

Mercantile Investment Trust

“If you want an income-generating investment trust targeting a low-cost and relatively sold-out segment of the UK market, Mercantile could be a good option. It offers scope and scale with nearly £2 billion in total assets,” said John Moore.

“With that comes the ability to switch – in other words, borrow money to buy more stocks when the opportunities arise, perhaps from open-ended funds that are forced sellers. His interests include Watches of Switzerland, industrialists such as IMI Group and homebuilder Bellway, who provide a wide range of mid- and small-cap exposure in the UK.”

The trust is currently trading at a 13.3 percent discount to net asset value and offers a 3.75 percent return.

It lost 29.1 percent last year and underperformed the UK’s All Companies AIC sector, which lost 24.8 percent. Over 10 years, however, the share price will have bounced back 129.4 percent above the broader sector’s 124.2 percent.

“The 3.7 percent return is relatively attractive and in terms of style and lack of portfolio overlap it complements Nick Train’s funds and City of London, among others,” Moore said.

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Jacky

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