Income seekers investing in listed shares of UK companies are currently at risk of losing out on billions of pounds in dividends, as a cessation of economic activity due to an enforced lockdown to stem the spread of coronavirus forces firms to cancel, cut or delay their pay-outs.
Companies cut more than £1bn worth of dividends between 17 March and 26 March, according to estimates from platform Interactive Investor. UK futures, meanwhile, are currently pricing in a fall in dividends of around 30% for 2020.
With reductions from the likes of ITV and Marks & Spencer already announced, there are also calls on the Bank of England to ban dividend payments from banks and pressure on oil majors after a slump in the oil price.
Therefore, it is a concern to investors about the ability of open-ended investment funds to maintain dividend payments in the future. However, investment trusts are able to move surplus income every year into a revenue reserve they can call upon when dividend payments are hard to find.
This is because unlike open-ended funds, which distribute whatever income comes in, investment trusts can smooth their dividends – saving money in reserves in the good times and using this to top up any shortfall in income in difficult years. This makes investment trust dividends a more reliable source of income for investors.
Many listed firms were forced to significantly slash dividend payments during and in the aftermath of the 2008 financial crisis but during this period, 11 out of 14 UK equity income investment trust companies still increased dividends, while the only dividend cut was one of 7%.
Indeed, of the Association of Investment Companies (AIC) 20 dividend heroes – investment trusts that have increased their dividend for 20 or more consecutive years – half are housed in the UK equity income sector.
The full list below gives the details of the dividend cover that some of the investment trusts hold in reserve for harder times. The table shows both Law Debenture and Chelverton UK Dividend currently have enough in reserve to pay their dividends for two full years if required. Those trusts that have one and a half years’ worth of pay-outs in reserve include BlackRock Income & Growth, Shires Income and Edinburgh IT.
Investec assessed the revenue reserves for the 17 UK equity income trusts it covers, modelling for a 30% fall in their income and a 3% dividend rise this year for each. In this scenario, none of the trusts’ reserves would fall into negative territory, although Troy Income & Growth would fall to just 0.3p per share.
Dividends are never guaranteed but many investors will be relying on their investment income to pay bills or for the weekly shop. The structure of Investment trusts’ is a huge advantage when dividends in general are under pressure.