When Tina Turner sang “We don’t need another hero“, she was referring to Mad Max in the Thunderdrome, rather than dividend-paying investment trusts. If she had been singing about investment trusts, I’m sure the lyrics would have been different because, in this case, heroes are exactly what we need. And lots of them.
High income heroes
Fortunately, the investment trust sector is more than happy to oblige. Currently, 20 trusts are yielding 7% or more, while four yield an incredible 10%. This kind of income is heaven-sent in troubled times like these, when cash should come with a health warning.
The definition of an investment trust dividend hero is a fund that’s increased its payout for 20 consecutive years, giving investors a consistently rising return. This is the real beauty of dividend yields, but one many investors overlook. Dividend-paying stocks aim to increase their payouts, year after year, which means you’re locking into a potentially-rising income stream.
The beauty of compound interest
Let’s do some simple maths here. Say you buy an investment trust whose share price is trading at £1, and its annual dividend is 5p. You are getting a 5% yield. After a decade, its share price has doubled to £2. The dividend has also doubled to 10p. This means new investors are still getting a 5% yield. However…
The original investor is actually getting a yield of 10%, based on their original investment. They paid in £1 but are getting 10p. Once you start looking at dividends in this way, they become even more attractive. Especially if you reinvest your dividends back into the stock, as you’ll hold steadily more shares or units over the years, multiplying your income.
Looking at it this way, the best dividend hero investment trusts are now yielding up to 18% on a 10-year basis, according to calculations from AJ Bell.
It found venerable investment trust Witan, launched in 1909, comes top of the pile for its current yield, at 17.9%. That means if you invested £10,000 a decade ago, you’re now getting dividends worth an incredible £1,800 a year. And you wonder why we at the Fool repeatedly bang on about the glories of dividend stocks and compound interest?
Witan also has one of the longest track records of raising its dividend, having done so for the past 44 years. Over the past decade, investors who had automatically reinvested their dividends would have seen a total return of 237.7%.
Henderson Smaller Companies and BlackRock Smaller Companies which, as their names suggest, invest in small UK businesses and boast 15 years of increasing dividends. The Henderson trust currently yields 11%, turning a £10,000 investment into £53,214 over the past decade. Meanwhile, the BlackRock trust has a 10.3% yield and the same investor would be sitting on almost £62,000. Combine dividend and growth, and you have something truly spectacular.
One dividend and growth hero I’d also like to highlight is Scottish Mortgage, which has delivered a total return of 523% over the past decade, turning a £10,000 investment a decade ago into £62,341 today.
AJ Bell personal finance analyst Laura Sluter said this shows the benefits of a buy-and-hold strategy. And you were thinking of putting your money in a Cash ISA paying just 1%, or so? Time to think again.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.