Dunedin Income Growth’s 35% dividend increase is ‘no guarantee of a better rating’

The leap in yield will see the UK equity income trust become one of the sector’s highest payers, but its poor performance is difficult to ignore.

Dunedin Income Growth (DIG ) today unveiled a progressive dividend policy that will see its yield increase by over a third for the year to end of January 2026.

The increased dividend of 19.1p per share represents a 34.5% uplift, equivalent to a share price yield of 6.5%.

This leap would see Dunedin go from the UK equity income sector’s seventh highest payer to third behind CT UK High Income Trust’s (CHI ) B shares and Chelverton UK Dividend Trust (SDV ), which yield 11.6% and 9.2% respectively.

Its increased dividend could encourage buying, thus narrowing the trust’s 7.7% discount, but QuotedData head of research James Carthew warned that investors may not be so easily swayed.

Dunedin Income Growth’s returns have been in the bottom quartile over the past three and five years. A 42.6% gain for shareholders, including dividends reinvested, in the past five years trails significantly behind the 75.7% average made by its peer group and was beaten to the bottom spot only by Finsbury Growth and Income (FGT ), which returned 18.4% over the period.

Carthew said: ‘Dunedin Income Growth’s performance track record is decidedly poor currently. Will investors be distracted from that by a higher dividend?

‘I’d point out that the two highest yielding shares in the UK equity income sector both trade on discounts, which might imply that a higher yield is no guarantee of a better rating.’

Carthew added that he was sceptical of trusts significantly increasing their dividends as it can pressure managers to buy lower-quality stocks that yield higher. However, Dunedin Income Growth’s larger payouts will be funded from its £298m in reserves, which would support its new dividend policy for the next 12 years.

In a stock market announcement, it said: ‘The board does not expect changes to the investment process as a result of the new dividend policy, with the company continuing to focus on high-quality companies and long-term capital and income growth, supported by a disciplined investment approach and integration of sustainability.

‘It will, however, give the company’s managers additional flexibility to focus on delivering total returns.’

Dunedin credited UK companies’ increasing preference for share buybacks over dividends as a key reason for the trust’s change in yield. It highlighted that the FTSE All-Share index’s net buyback yield jumped from 0% to 2% in the 10 years to 2024, while dividend payments plateaued over the same period.

It added: ‘Over the long-term, income return through dividends has been a significant proportion of the total return generated by the company, and the board is very aware of the importance of regular and reliable dividends to shareholders. 

‘Recognising investors’ continued appetite for yield, the board has reviewed the company’s dividend policy with the aim of making the company’s shares more attractive to a wider range of investors whilst making use of the inherent advantages of the investment trust structure.’