Link: ‘Amazing’ investment trusts are all ‘dividend heroes’

Equity investment trust dividends have dipped 3%, but overall, London-listed closed-end funds have provided a safe haven for income investors.

Equity investment trust dividends have fallen for the first time in a decade, but overall, London-listed closed-end funds have provided a safe haven for income investors in the pandemic, new analysis shows.

The latest Investment Trust Dividend Snapshot from Link Group reveals dividends from equity investment trusts dipped 3.1% to £891.9m in the first half of this year. This is £29m less than the same period in 2020 and the first fall in pay-outs since 2010, after the global financial crisis.

By contrast, the wider UK stock market saw dividends, excluding one-off special payments, rise 8% as they recovered from cuts, cancellations and suspensions following the outbreak of the Covid-19 pandemic. 

However, the broader dividend wipe-out seen in the UK stock market since the pandemic started 18 months ago makes the fall in investment trusts distributions appear minor.

Between January and June 2021, UK dividends slumped by 34.6%, although across the world as a whole, dividends fell only 5.9%. If the UK figure was replicated in the investment trust sector, investors would have seen pay-outs fall almost a fifth over the same period, said Link. In fact, they rose 2%.

This was thanks to £2.13bn in revenue reserves investment trusts had accumulated before the pandemic, allowing the listed equity funds to continue to pay investors an income despite the companies they invest in cutting dividends. 

Unlike open-ended funds, investment trusts and investment companies are allowed to keep up to 15% of the income they receive from investments each year. This enables them to ride out falls in investment income and, in many cases, establish long track records of more than 20 years’ consistent annual dividend growth ahead of inflation, a feat for which their trade body, the Association of Investment Companies (AIC), has dubbed them ‘dividend heroes’.

The level of reserves had dropped 17% to £1.77bn by mid-July this year after 56% of trusts used them to fund dividends. This means £22 in every £100 of dividends paid by equity investment trusts over the last 12 months came from reserves.

Ian Stokes, Link’s managing director for corporate markets in Europe, the Middle East and Africa, said: ‘Investment trust dividends cannot defy gravity, but they do come with a very plump cushion.

‘Not only do they keep cash in reserve, but they can also bank some of the big capital gains they have made over the last year and hand these out to shareholders too.’

He said the ability of trusts to smooth income returns is one of their most reassuring features and ‘the amazing stability of investment trust dividends through the pandemic is testament to this flexibility’.

Ian Sayers, AIC chief executive, said that although equity trust pay-outs had fallen, the total distributions paid by all investment companies – including those invested in alternative assets such as infrastructure, debt and private equity – had risen 11% between the first half of 2020 and the same period this year.

‘For the full year in 2020, more than four-fifths of equity income-paying investment companies increased or maintained their dividends to shareholders despite the impact of the pandemic,’ he added.

‘By contrast, less than a quarter of equity income-paying open-ended funds increased their dividends in 2020 and none held dividends at the same level as 2019,’ said Sayers.

Top investment trust dividend payers

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Sector Company First half 2021 payment Current yield
UK Equity Income City of London (CTY ) £41.4m 4.80%
Global Equity Income Murray International (MYI ) £39.2m 4.80%
Global Emerging Markets Templeton Emerging Markets (TEM ) £35.5m 1.50%
Global F&C Investment Trust (FCIT ) £33.7m 1.40%
UK All Companies Mercantile (MRC ) £31.7m 2.30%
Global Alliance Trust (ATST ) £23.1m 1.40%
Commodities & Natural Resources Blackrock World Mining (BRWM ) £23m 3.40%
Global Witan (WTAN ) £21.9m 2.20%
UK Equity Income Edinburgh (EDIN ) £20.7m 3.90%
UK Smaller Companies Aberforth Smaller Companies (ASL ) £20.3m 2.10%
UK Equity Income Finsbury Growth & Income (FGT ) £17.9m 1.80%
UK All Companies Fidelity Special Values (FSV ) £17.4m 1.90%
UK Equity Income Law Debenture (LWDB ) £17.3m 3.50%
Asia Pacific Income Henderson Far East Income (HFEL ) £16.9m 7.60%
UK Equity Income Merchants (MRCH ) £16.7m 5%
Europe Fidelity European (FEV ) £16m 2%
European Smaller Companies European Assets (EAT ) £14.4m 5.50%
UK Equity Income Murray Income (MUT ) £14.3m 3.60%
Global Bankers (BNKR ) £14.1m 1.80%
Asia Pacific Schroder Asia Pacific (SDP ) £13.3m 1.30%


The UK’s swift economic bounce back from the Covid-19 outbreak has allowed dividends to recover but as investment trust pay-outs tend to lag the wider market, Link expects trust dividends to decline over the next six months as ‘the rebound in the amount of income paid to trusts by the companies held in trusts will still leave a shortfall compared to pre-pandemic levels’.

Link is forecasting that trusts will pay £1.79bn in total dividends for 2021, 3.2% lower than last year.

Three in 10 equity trusts made a cut in the first half of this year but those that did made an average reduction of 23%.

The biggest impact came from the UK Equity Income sector, mainly due to it being the largest income-paying sector, contributing a quarter of dividends from equity trusts. Pay-outs fell 9% year-on-year over the first six months of the year, a drop of £20.3m.

The sector delivered the biggest dividend payer over the past six months, with City of London (CTY ) paying out more than £41m (see table). The £1.7bn trust, managed by Job Curtis at Janus Henderson, declared its 55th consecutive year of rising dividends this year.

However, rival Temple Bar (TMPL ) was forced to cut its payout by a quarter when it appointed RWC Asset Management as its new fund manager last September.

The global investment trust sector suffered a decline of 10%, which also made a ‘significant impact’, said Link. The £1.4bn Murray International (MYI ) portfolio of global stocks also made it onto the top dividend payers list, distributing nearly £40m to shareholders.

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