We could be (dividend) heroes

David Prosser discusses the next generation of investment company dividend heroes and how they have been able to consistently increase dividends for 10 to 19 consecutive years.

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David Prosser discusses the next generation of investment company dividend heroes and how they have been able to consistently increase dividends for 10 to 19 consecutive years. 

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It is reassuring to hear that we can trust the next generation. The AIC’s “dividend heroes” are well known; each one has raised its dividend in each and every year for the past 20 years. But you may be less familiar with the “next generation of dividend heroes” – these are funds on their way to fully fledged dividend hero status with at least ten years of consecutive dividend hikes – and the way in which it continues to grow.

The latest list of these next generation funds was published just a few days ago and its ranks have swelled to 26 since last year. Four more funds have now clocked up ten years of dividend increases – Dunedin Income Growth, Fidelity China Special Situations, North American Income and Lindsell Train – entitling them to join those now building on the same track record.

The release could hardly have been better timed. Within 48 hours, the Office of National Statistics was announcing that the UK’s inflation rate has now risen to 6.2%, a 30-year high. The Bank of England expects that number to rise even further in the months ahead – possibly reaching 8% or more. Against this backdrop, an investment fund that can be relied upon to deliver a consistently rising income is invaluable.

Some of the Next Generation funds are now poised to graduate. At the top of the table, Athelney has now racked up 19 years of consecutive dividends; it will join the dividend heroes if it can complete just one more. BlackRock Smaller Companies and Henderson Smaller Companies are on 18 years, so they’re not far behind.

How are these funds pulling off such consistency? It comes down, of course, to the unique structural advantage that investment companies enjoy – the fact they are allowed to retain portfolio income in strong years in order to subsidise pay-outs in leaner times. For boards and managers that choose to exploit this advantage, it is possible to build a long track record of sustained dividend increases.

In addition, for some years now, investment companies have had the option of paying dividends from capital, as long as shareholders have given permission for such a policy. It’s not a tactic to be employed lightly – it leaves less capital on the table – but for investors for whom income is all-important, it’s potentially useful. Most investment companies in the dividend heroes and the next generation lists haven’t achieved their consistency in this way, but it provides a fall-back position.

What’s important to recognise is that regular dividend income increases do not necessarily equate to high yield. The next generation funds currently offer yields ranging from just 1.2% to more than 8%; what you’re getting in most cases is dependable and increasing income over time – a good defence against inflation – rather than a blockbuster pay-out today.

Note too that these funds come from a multitude of sectors. You might expect the next generation list to be dominated by equity income investment companies – and there are ten of them on the list, albeit spread across UK-focused funds, those with a global mandate, and several Asia Pacific specialists.

In addition, however, the list features everything from UK smaller companies funds to North America vehicles, with a China specialist and a property securities investment company thrown in along the way. That’s just the funds that invest in equities; the Infrastructure and Debt sectors are also represented.

In other words, it is perfectly possible to build a well-diversified portfolio from the next generation list, whether by geography, by size of company or asset class. It’s not a bad way to attempt to mitigate the effects of spiking inflation – and for those who don’t need the dividends these funds pay out, there’s always the option of reinvestment.