Dividends are becoming scarcer. Could looking at what the investment professionals did last month offer clues about where to look for income? I think so. I’ve taken a look at what three investment trusts revealed in their June factsheets (the latest ones available at the time of writing). I’ve done this to try to understand where they’re looking for income or growth.
Professional buying Next shares
I’ll look first at the high-yielding investment trust Merchants Trust (LSE: MRCH). Its top holdings are GlaxoSmithKline and British American Tobacco, which each account for over 5% of the trust’s value.
But I’m more interested in what the manager has been actively doing to navigate this current tricky market. It’s clear they’ve been active. A new position in retailer Next was added. The manager commented:
Whilst current trading is under huge pressure from the lockdown and social distancing, Next has reacted in its characteristically decisive way to protect its financial position and reposition for the future. Although the business cancelled its recent dividend, we would expect Next’s historically strong cash flow to recover, in the medium term, and for ordinary and possibly special dividends to resume.
The trust also added to its positions in National Grid and SSE. The manager cited commitments to dividend policies as well as long-term growth in renewables as reasons to add more.
Adding to an in-favour pharma share
The management of the Murray Income Investment Trust (LSE: MUT) added to their AstraZeneca holding. Although it has a high price-to-earnings ratio, the pharma company has been growing. It has been involved in finding a vaccine for Covid-19, which has lifted the share price even further. Also for a number of years it has built up an impressive drug pipeline. Its focus on oncology has helped boost the shares.
AstraZeneca has a modest dividend yield because of the share price rise. It is a company with growth potential and potential dividend growth as earnings rise. I’m pleased to have held onto it over recent years. This seems like a very sensible investment, although many investors will be put off by how expensive the shares now appear to be.
Looking for dividend growth
Lastly, I’ll turn my attention to Troy Income & Growth Trust (LSE: TIGT). It added to its relatively new holding in FTSE 100 testing company Intertek. The manager made no particular mention of why that position was increased, but based on an interview, it appears the reason for investing originally was to find lower-yielding companies with potential for dividend growth. The manager was also specifically looking for high-quality engineering or industrial companies.
So the key lesson that could be gleaned from these examples is that the professionals are increasingly less concerned about the headline dividend yield. As the manager of Troy points out, the big dividends are too concentrated in a handful of companies – often in commodities. Instead, they will accept a lower yield that can be sustained by earnings growth and as a result are less likely to be cut. I’m inclined to follow their example in the hunt for income.
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Andy Ross owns shares in AstraZeneca, National Grid and Merchants Trust. The Motley Fool UK has recommended GlaxoSmithKline and Intertek. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.