Following the success of our Heritage portfolios and to provide a more reliable source of income from investment trusts, we have now launched two natural dividend paying portfolios. These two new Heritage Dividend portfolios take advantage of the excellent history of investment trust equity growth and dividend security along with low-cost passive index tracking OEIC funds for gilt and bond exposure.
So far this year £30 billion in dividend cuts or reductions have been made due to the coronavirus crisis. This will directly reduce natural income available from OEICS, but will not have the same impact on investment trusts. Trusts can withhold 15% of their income from previous years to smooth dividend payments in leaner years such as this one.
The Heritage Dividend Cautious and Balanced portfolios are aimed at investors pursuing a natural dividend income and are ideal for pension funds in drawdown or for income seeking investments. The cautious portfolio has an expected dividend yield of over 3% and the balanced portfolio has an expected dividend of over 3.5%.
Overall, costs are competitive due to the generally lower cost of investment trusts compared to an actively managed OEIC and the use of index trackers for bond exposure.
Investors have differing needs and requirements from their money. Many seek capital growth over time in order to improve wealth and opportunities. Others, having built wealth, now seek income and often turn to dividends as an inflation beating form of regular return. It is common for major corporations to issue attractive dividends to their shareholders that rise in value each year.
One great incentive to an investor to purchase and maintain their shareholding is an attractive dividend. It is common for a Board of Directors to go to great lengths to protect the level of their dividend and it is expected by their shareholders. However, in times of great financial difficulty such as during the great financial crisis of 2008 and now with the coronavirus crisis, many listed firms have been forced to significantly slash dividend payments. In the case of UK banks, the government has insisted that their dividends be withheld.
The reduction or suspension of a dividend payment will have an impact on both direct shareholders and holders of open-ended investment company (OEIC) income funds that invest in that stock. If dividends are cut or stopped, the ability of OEICs to maintain dividend payments in the future will be jeopardised as they must distribute whatever income they receive when they receive it. They have no means to store income for ‘a rainy day’.
Investment trusts are able to smooth their dividends by saving money in reserves during periods of prosperity which are available for use to make up any shortfall in income during difficult years. This makes investment trust dividends a more reliable source of income for investors and gives investment trusts the additional benefit of dividend cover.
Some outstanding examples of long-term consistent growth in dividends can be seen within the investment trust sector. For example the City of London Investment Trust, Bankers Investment Trust and Alliance Trust have all raised their dividends for 53 years in a row. A further 18 also qualify as Association of Investment Companies (AIC) ‘dividend heroes’ because they have raised their dividends for 20 or more consecutive years. These include Caledonia Investments which has raised its dividends for 52 consecutive years. Seven trusts have increased their dividends for 40 or more consecutive years and five have done this for more than 30 years.
Dividends are never guaranteed but many investors will be relying on their investment income to pay bills or for the weekly shop. With over £30 billion in dividend cuts or deferrals already this year, OEICs will not be able to continue to pay consistent dividends. An investment trust, on the other hand, should have a huge advantage because they are able to call on previous reserves to help maintain, or even grow, their dividend income.