The dividend heroes

1966 must have been a miserable year for shareholders in the venerable Scottish investment company Alliance Trust. Not only did they have to endure the misery of their neighbours South of the border winning the World Cup, but their fund decided not to increase the dividend paid to investors for the first time since the Second World War. Still, on the plus side, England have not got anywhere those dizzying heights and Alliance Trust has raised its dividend in every year since.

In fact, Alliance is not alone in establishing such an enduring track record of dividend increases. Three investment companies have currently increased their dividends each year for 50 years, with City of London Investment Trust and Bankers Investment Trust also reaching their half century. Just behind them is Caledonia, which has increased its dividends for 49 years in a row, while a further six funds have already gone past 40 years.

The dividend heroes ranking published by the Association of Investment Companies each year has become such a familiar construct that it’s easy to take it for granted. But we shouldn’t do so: it really is remarkable that so many funds have been able to raise their dividend every year without fail for so long. In addition to that top 10 with more than 40 years of dividend increases, another 10 have 20 years or more safely banked.

These funds have raised their dividends in even the most trying of market environments – from the economic slump of the 1970s to the financial crisis of 2007 and 2008. They have been able to do so because of the unique ability of investment companies to build up revenue reserves; these contingency funds grow during years when the fund earns good income on its investment and can be drawn upon in more disappointing times.
For investment companies that operate this way, the effect is to smooth out the income distributions they make to shareholders. And for large numbers of investors who depend on their portfolios to generate an income, that smoothing process is invaluable: if you’re relying on dividend income, feast and famine is difficult to manage – you want a steady stream of income rather than a bumper yield one year and nothing the next.

Indeed, we may be about to see the value of investment companies in this regard proved once again. While 2015 and 2016 were good years for stock market dividends – though largely thanks to the fall in the value of sterling last year – the outlook for the next 12 months looks less promising right now. Beyond the investment company universe, many funds may find it difficult to make more generous distributions in the years ahead.

It’s also worth pointing out that increasing numbers of investment companies now pay dividends on a quarterly basis, a further benefit for income-seeking investors. Some 46 per cent of funds offered this option at the last count, including most of those on the dividend heroes list.

In short, the investment company sector offers a rare beacon of light in these trying times for investors seeking to generate income from their portfolios. In an ultra-low interest rate environment and amid mixed prospects for stock market dividends, many investment companies continue to offer solid, reliable and regular income year after year.