The top trusts for income

Annabel Brodie-Smith, communications director of the Association of Investment Companies, says the ability to retain dividends is a key benefit of the investment trust structure.

Last month JPMorgan Cazenove highlighted what is undoubtedly one of the key benefits of the closed ended structure – the ability to build up revenue reserves for a rainy day and use them to smooth dividends.

It reported that the highly regarded Newton Higher Income open-ended fund had cut its forward dividend target by 20%-25% due to concern that, in this environment, supporting the current dividend would increasingly
affect the fund’s overall return to investors.

Therefore a reduced dividend target will give the manager increased flexibility to invest across a spectrum of UK equities.

This echoes the dividend cuts made by a number of other open-ended funds during 2009.

In contrast, this week the investment trust, City of London, announced in its results their 45th consecutive year of dividend increases.

The structural benefit of investment trusts, which has allowed them to obtain an enviable dividend track record, is the ability to retain up to 15% of dividends each year.

These retained dividends are transferred to the revenue reserves and are used to boost dividends in difficult years.

This has been used very effectively by a significant proportion of the investment company industry to produce consistent, reliable dividends.

Some 16 investment companies have consistently raised their dividends each year for over 20 years with seven investment companies breaking the 40 year mark.

They are City of London Investment Trust (45 years), Alliance Trust
(45 Years), Caledonia Investments (44 years), Bankers Investment Trust (43 years), Albany Investment Trust (42 years), F&C Global Smaller Companies (41 years) and Foreign & Colonial Investment Trust (40 years).

Another nine investment companies have raised their dividends for over 20 years including the Brummer Investment Trust which has raised its dividend for 39 years, JPMorgan Claverhouse Investment Trust which has raised its dividend for 38 years and Witan Investment Trust which has raised its dividend for 36 years.

Looking at the top three most consistent dividend paying companies’ performance, City of London in the UK Growth & Income sector is trading on a 2.6% premium, with its share price total return up 4% over the last year and 97% over the last ten years.

Alliance Trust, a Global Growth company is trading on a 15% discount, with its share price total return up 6% over the last year and 63% over ten years.

Caledonia has suffered over the last year with its share price total return down 3% and is trading on a 21% discount.