For investors who have come to rely on equity income funds for safe, predictable, and growing income, investment trusts could hold an advantage over unit trusts and other open-ended funds.
Even during the recent financial crisis, when many companies were forced to cut their dividends or even stopped payouts altogether, many investment trusts managed to continue to increase their shareholder payouts. As such, there are a number of trusts with multi-decade-long track records of rising payouts today.
This is because investment trusts, unlike many open-ended funds, are not required to pay out all of the dividends generated by their underlying equity portfolios. They can hold back up to 15% of the dividend income they earn to supplement payments to shareholders in leaner years, smoothing out their dividend payments over the long term.
And following a rule change in 2012, investment trusts now have even more flexibility. They are even allowed to fund dividends out of capital returns, meaning that should their revenue reserves run out, they can sell some of their investments to make dividend payments.
Inflation-beating dividend growth
The £1bn-plus Bankers Investment Trust (LSE: BNKR) has one of the longest track records of consecutive years of dividend increases, with 50 years under its belt, according to data from the AIC.
Although shares in the investment trust yield just 2.2%, a major attraction of Bankers is its dividend growth. Not only does it plan to raise dividends each year, but it is targeting inflation-beating regular dividend growth of more than the rise in the Retail Price Index.
The trust also aims to achieve long-term asset growth in excess of the FTSE All-Share Index by means of its flexible investment approach and broadly diversified international equity portfolio. Big multinationals dominate its portfolio, with BP (1.8%), Apple (1.7%), British American Tobacco (1.5%), American Express (1.5%), and American Tower (1.4%) being its top five positions.
Performance figures for the past five years are encouraging as shares in the fund delivered a total return of 123%, easily beating its benchmark index performance of just 63%.
Diverse range of investments
Caledonia Investments (LSE: CLDN) became the latest trust to reach the impressive milestone of 50 years of consecutive dividend increases earlier this year.
Unlike Bankers, Caledonia is self-managed and owns a very diverse range of underlying investments. And one thing which really sets the it apart from many of its peers is that it invests around 27% of the value of its portfolio value in unquoted companies, which gives those trusting it with their cash exposure to a sector which is generally reserved for private equity investors.
Despite its strong dividend growth record, Caledonia trades at a rather big discount to its net asset value (NAV). Although this is partly due to the difficultly in valuing its unlisted equity investments, recent moves made by the fund manager should allay some of the concerns.
The fund recently sold down some of its unquoted investments, including a £197m stake in Park Holidays, in order to realise value for shareholders. And with the proceeds of the sale, it paid a special dividend of 100p per share in August, demonstrating that it is a shareholder-friendly fund.
At its current share price, Caledonia Investments currently trades at a 19% discount to NAV, with a regular dividend yield of 2%.
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