The investment trust industry celebrates its 150th anniversary this year and continues to cement its reputation as an attractive option for investors seeking a stable income stream.1
The oldest investment trust, the Foreign & Colonial Government Trust, as it was originally known, was set up in 1868, offering a diversified portfolio of government bonds with the hope of providing an attractive dividend yield. The founders originally intended to raise £1 million, but the trust currently has assets valued at impressive £3.5 billion, second only to the Scottish Mortgage Trust2
There are around 390 investment trusts and companies for investors to choose from, with dozens that have a long-running history of increasing payouts, according to trade body the Association of Investment Companies (AIC). The AIC has published its 2018 list of “dividend heroes”, highlighting those investment trusts that have increased their dividends consistently over time.3 This said, it’s important to bear in mind that this, like all past performance of investments, is not a reliable indicator of future performance.
Many investors rely on regular dividends for a steady income, which may be particularly important to them given market turbulence since the start of the year, and the current low interest rate environment. Investment trusts can be especially useful for income-seekers, given their ability to hold back income payments when times are good, with fund managers able to draw on these reserves during periods when market conditions are more challenging.
Find out more about investment trusts
There are four “dividend hero” investment trusts that have raised dividends every year, without fail, for half a century or more. According to the AIC, three of those listed - City of London Investment Trust, Bankers Investment Trust, and Alliance Trust - have all increased their dividend payouts for 51 consecutive years. Meanwhile, Caledonia Investments has increased its dividend for 50 years in a row. That means these trusts have even raised their dividend payouts during particularly difficult times, such as the financial crisis, and during recessions.
The sustainability of dividend payments is an important factor for many investors when building a portfolio. These payments may be used to provide additional income or can be reinvested with the aim of boosting the long-term growth potential of investments.
A total of 21 investment trusts have delivered dividend increases for at least the past 20 years and are among those that might appeal to investors seeking consistent income, although again, remember that past performance should not be relied on as a guide to the future.
The outlook for dividend payouts
There are no guarantees that companies, investment trusts or any other fund will continue to provide dividend income in years to come. Just as with the value of underlying investments, dividends may rise as well as fall. You could lose, as well as gain, money, and you must be prepared to accept the risk you could get back less than you put in.
After a record year for payouts in 2017, investors may need to rein in their expectations for 2018. According to the latest UK Dividend Monitor from Link Asset Services, formerly Capita Asset Services, the total amount received in dividends by investors increased by 10.5% in 2017 to £94.4 billion, the fastest underlying growth rate since 2012.4
The growth of dividends, however, is mainly due to exchange rate gains among the UK’s biggest companies listed on the FTSE 100, which will have diminished in 2018, unless the value of sterling weakens again as Brexit negotiations continue. Many of the companies listed on the FTSE 100 receive earnings overseas, which sees their profits rise in value if sterling falls, and conversely, profits may fall if sterling strengthens. Yet even so, Link Asset Services expects payouts to remain at or near 2017’s record highs, with companies expected to maintain their dividend payments, even if they are unable to increase them.
Do your research
There are plenty of ways to seek out companies that currently provide attractive dividend payouts that may have the potential to grow over time. When researching companies, check whether their earnings are growing over time, and that they have plenty of cash reserves for the future, making them more likely to offer a portion of their profits to shareholders.
Examples of popular income-payers include GlaxoSmithKline, the British pharmaceutical giant However, remember that as with any investment, returns aren’t guaranteed, whether as dividend payouts or growth of a fund, and you may get back less than you invested. There is the risk that you don’t receive any dividends, and the share price falls.
You can check current dividend yields for companies using Barclays’ Research Centre, which also shows you the funds that are currently paying the highest dividend yields.
Visit our Research Centre
Bear in mind that since April 6 the tax rules around dividend income have changed, with the amount you can earn tax-free outside a pension or ISA falling from £5,000 to £2,000. Above this threshold, dividends are subject to tax, at 7.5% for basic-rate taxpayers, while higher-rate and additional-rate taxpayers have to pay 32.5% and 38.1% respectively.
Remember that tax rules might change in future and their effects on you depend on your individual circumstances, which can also change over time. Investments, and the income they provide, can fall as well as rise and you may get back less than you invested. Past performance is not a reliable indicator of future performance. If you’re unsure where to invest, seek professional financial advice.