The investment trusts delivering inflation-beating dividend growth

‘Dividend hero’ investment companies have grown their dividends to shareholders well ahead of inflation over the past five years, according to new data from the Association of Investment Companies (AIC).

The AIC dividend heroes are investment companies which have increased their dividends for 20 or more years in a row. 17 of these 18 heroes have delivered compound annual dividend growth ahead of the UK Consumer Prices Index (CPI) over five years*, among them, four Elite Rated investment trusts:

Elite Rated dividend heroes

Investment companyAIC sectorNumber of consecutive years dividend increasedDividend yield (%)5-year annualised dividend growth rate (%)
City of London Investment TrustUK Equity Income544.94.4
BMO Global Smaller CompaniesGlobal Smaller Companies501.012.0
Scottish Mortgage Investment TrustGlobal390.32.9
Schroder Income GrowthUK Equity Income254.14.1

Source: AIC/Morningstar. Data as at 27 May 2021.

The story is similarly strong in the next generation of dividend heroes – investment companies which have grown dividends for ten to twenty consecutive years – with 92% having delivered five-year dividend growth ahead of the CPI. A further five Elite Rated offerings appear in this list:

Elite Rated ‘next generation’ of investment company dividend heroes

Investment companyAIC sectorNumber of consecutive years dividend increasedDividend yield (%)5-year annualised dividend growth rate (%)
Murray InternationalGlobal Equity Income164.53.2
Schroder Oriental IncomeAsia Pacific Equity Income133.65.2
Fidelity Special ValuesUK All Companies112.011.6
LowlandUK Equity Income114.37.9
TR PropertyProperty Securities113.311.2

Source: AIC/Morningstar. Data as at 27 May 2021.

“Inflation hasn’t been at the top of investors’ worry list for a long time,” commented Annabel Brodie-Smith, communications director of the AIC, “But with economies reopening quickly from the pandemic and a perception that central banks may be softening on keeping prices in check, it’s easy to see why investors are becoming more concerned. Investment companies’ ability to hold back up to 15% of their income each year in a revenue reserve gives them a huge advantage in delivering inflation-busting income to investors.”

Job Curtis, manager of The City of London Investment Trust, said “In 2020, the pandemic and lockdown of the economy caused significant disruption to dividends. However, The City of London Investment Trust was able to increase its FY2020 dividend by 2.2%, partly funded from revenue reserves. This was the 8th year out of 29 that City of London has drawn down revenue reserves; during the other 21 years the revenue reserve has been added to. In general though, the outlook for dividends is improving given the reopening of the UK and overseas economies and strong economic growth.”

Sue Noffke, manager of Schroder Income Growth Fund added: “We construct the portfolio to ensure that the fund has an attractive dividend to investors today, as well as securing growth of the dividend after adjusting for inflation. Looking at the portfolio today, overall we estimate that just under half of the portfolio continues to grow dividends over the longer term and that these companies’ dividends have not been impacted by the Covid Pandemic. This component of the portfolio comprises three elements – companies yielding broadly in line with the market, companies yielding less than the market, but growing faster, and companies yielding in excess of the market and growing faster, in the ratio of 3:2:1 respectively.

“Around one third of the portfolio has broadly stable dividends. This bucket is split not quite equally, between those lower yielding companies with stable dividends which are funding growth opportunities, and a slightly bigger bucket of companies with more mature businesses which have stable to low growth dividends, but higher yields. The balance of the portfolio, 15-20%, has seen dividends impacted by the Covid Pandemic. Our assumption for these companies is that this will be broadly temporary and that dividends will be reinstated as economies open up and profitability restored.”

“Inflation is the silent assassin of wealth,” concluded Bruce Stout, manager of Murray International Trust. “Whilst sharp equity market declines and violent bouts of evaporating investor confidence may grab the news headlines and be recognised as instantaneous perpetrators of capital loss, the covert decay of spending power through prices rising faster than incomes seldom attracts much attention. And why should it? For the current investment generation brought up on a diet of debt, deflation and digital disruption, inflation arguably remains an alien concept – confined to the history books alongside the dodo, mammoth and other extinct species.

“Yet contrary to expectations and inherent prejudice, global inflation appears to be alive and well. As the world emerges from the global COVID pandemic, failure of global supply chains to keep up with extraordinary pent-up demand has fanned the flames of inflation once again. For income focused investors, relying on real dividend growth to pay for the rising cost of living, these are increasingly anxious times.

“Unburdened by geographical confines, sector restraints, asset class constrictions or benchmark obsessions, truly globally diversified investment trusts can invest anywhere to focus on companies truly committed to increasing dividend payouts and long-term wealth creation for shareholders. By investing wisely and globally, the world is truly becoming the oyster for sustainable real income growth.”

*The annualised rate of CPI in the five years to April 2021 was 1.8%.

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.