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 were forced to significantly slash dividend payments. In the case of UK banks the government insisted that the dividend be held back.

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 have to distribute whatever income they receive. They have no means to store income for ‘a rainy day’.

Investment trusts have the ability 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. Investment trusts therefore have the additional benefit of dividend cover.

Reliable source of income

Some outstanding examples of long-term consistent growth in dividends can be seen within the Investment Trust sector. For example City of London Investment Trust, Bankers Investment Trust and Alliance Trust have raised their dividends for 53 years in a row, while a further 18 also qualify as Association of Investment Companies (AIC) ‘dividend heroes' because they have raised their dividends for 20 or more years in a row. These include Caledonia Investments, which has raised its dividends for 52 years in a row. Seven trusts have increased their dividends for 40 or more years in a row and five have done this for more than 30 consecutive years.

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.