Chelverton UK Dividend Trust (SDV) has confirmed that the final capital repayment on its 2025 Zero Dividend Preference shares (ZDPs) has now been made in full. As a result, the trust is currently ungeared, with net assets of £30.85m as at 7 May 2025, invested across a diversified portfolio of UK small and mid-cap companies.

Following the removal of gearing, the board has announced a revised dividend policy. While the change in capital structure will reduce the trust’s underlying income, the board intends to draw on revenue reserves – £2.8m as at 31 October 2024 – to maintain what it describes as an attractive distribution, and has committed to paying a total annual dividend of 10.00p per share for the next three financial years to April 2028, equivalent to a 7.6% yield based on the share price at 8 May 2025.

For the current financial year to 30 April 2025, the company reiterates its intention to pay a total dividend of 13.00p, in line with previous guidance.

The manager sees a supportive macroeconomic backdrop, with falling inflation and the beginning of interest rate cuts in the UK. David Horner, investment director at Chelverton Asset Management, highlights the rarity of UK smaller companies underperforming large caps for three consecutive years – something seen only twice in the past 50 years, including now. He believes that the low valuations across the small and mid-cap universe provide scope for a strong recovery.

The board and manager remain confident in the growth potential of the current portfolio and are actively exploring options to reintroduce gearing when market conditions allow.

[QD comment MR: SDV’s repayment of its ZDPs and transition to an ungeared structure mark a significant turning point for the trust. While the lower dividend guidance reflects the reduced income capacity of an ungeared portfolio, the targeted 10.00p per annum still offers an attractive yield, particularly in the context of improving UK economic conditions and depressed valuations in the small and mid-cap space. The manager’s emphasis on historical underperformance cycles and the potential for sharp recovery echoes a common theme in recent commentary on UK equities. Investors may appreciate the clarity on dividends over the next three years and the flexibility retained to reintroduce gearing when the timing is right.

That said, with net assets of just £30.85m, there has to be a question over the long-term viability of a trust of this size – particularly if it takes time to reintroduce gearing or if markets remain sluggish. In the absence of scale or growth, the board may come under pressure to consider strategic options.]