One question I have been pondering is, how would an income investor reliant on a portfolio of investment companies be faring now? Unfortunately, it looks as though some belt-tightening would be required.

For example, companies that adopted a dividend policy of paying a proportion of their income from capital each year, of which there are quite a few, may have a problem. This year, following a period of poor capital performance, many of those dividends may be static or falling.

Trusts such as JPMorgan Global Growth and Income (JGGI ) and Invesco Asia (IAT ), which pay out around 4% of net asset value (NAV) each year, fall into this category. Both their NAVs were flat over 2022, which given the turbulent markets was not a bad result. However, meaningful dividend growth this year is unlikely as a result.

For Invesco Asia, its 4% dividend yield, while attractive, is not the primary reason why most investors would buy this trust. They would probably be more interested in the fact that it has delivered twice the return of its MSCI AC Asia ex-Japan benchmark over the past 10 years.

For JGGI, there is some potential frustration for shareholders about the real terms fall in dividends. That could grow if markets go sideways or fall this year and I wonder whether the fashion for manufacturing income from capital will abate?

For those investment companies generating the revenue they distribute, one alternative to JGGI in the global equity income sector is Henderson International Income (HINT ). It has a track record of growing its dividends faster than inflation over the past five years. However, increases to its quarterly dividends for the current financial year have been more modest, running at about 2.8% year-on-year.

Another alternative is Murray International (MYI ), which has outperformed both JGGI and HINT in capital terms. While its dividend growth has been negligible in recent years, the trust’s revenue account is looking much healthier than it has done in some time. There may be room for a larger dividend increase this year, but we will have to wait a month or so for the annual results to find out.

One of the attractions of investment companies is their ability to build and then dip into revenue reserves. However, while that is likely to cushion investment trust shareholders from the effects of possible recessions over the next couple of years, most boards would shy away from using reserves to deliver inflation-matching dividend increases.

However, one trust that has indicated that it would consider doing so is JPMorgan Multi Asset Growth and Income (MATE ). Since March 2021, it aims to increase its dividend in line with the UK’s annual consumer price index, drawing on its distributable revenue and capital reserves when the dividend is not covered by current year income. The board was anticipating the risk of rising inflation and investors’ need for reassurance around the impact of this on their real income when it adopted this policy.

The UK Equity Income sector is still more than twice the size of the Global Equity Income grouping. For domestic companies, if the pundits are right, dividend growth will be anaemic this year. The IMF says that the UK will be the only major economy to shrink in 2023. However, much of the income in the UK market comes from big global companies.

In the most UK dividend report from Link Group, the picture was not looking great as it expected underlying dividends of £86.2bn in 2023, an increase of 1.7% on last year. Including special dividends, headline pay-outs are forecast to fall 2.8% to £91.7bn.

There are some UK equity income trusts with good track records of dividend growth but hiking dividends in line with inflation this year seems unlikely. Law Debenture (LWDB ) stands out both for its capital performance and its record of dividend growth which have been underpinned by the success of its trustee business. In its current financial year, dividend growth seems to be running at about 5.5%, and at the half-year stage, dividends were well covered by earnings, which is reassuring.

Chelverton UK Dividend (SDV ) is doing a good job of growing its income too. Its quarterly dividends run at about 7% higher than a year earlier, following 10% growth for the prior year. However, these dividends were not covered by earnings.

Another potential source of inflation-matching dividends is the property sector. For example, Impact Healthcare Reit (IHR ) benefits from inflation-linked rental agreements and is committed to passing the benefit of these through to its shareholders in the form of dividend increases. However, these will not quite match the inflation rate, as the rent uplifts are capped to avoid putting too much strain on tenants.

It ought to be a similar story over in the specialist supported social housing sector, where Triple Point Social Housing (SOHO ) has just voluntarily capped its rental uplifts at 7%, to match the government-imposed cap on rental increases in general needs social housing. However, SOHO is experiencing problems with rent collection from a couple of tenants, which could put a spanner in the works. If those are sorted out, by reassigning the leases perhaps, the shares look cheap on a 54% discount and 10%+ yield.

Elsewhere, the infrastructure and renewable energy sectors often highlight the degree of inflation linkage within their revenue streams, and this might present the best opportunity. While many funds have rowed back on their original pledges to link dividend increases with inflation, there are some that have stuck with the policy, albeit there tends to be a lagged effect here.

For example, NextEnergy Solar (NESF ) has increased its target dividend at least in line with UK retail prices index (RIP) every year since it listed in 2014. Its 7.52p dividend target for the 12 months to 31 March 2023 is 5% higher than the dividend for the previous year. That target was set in April 2022 when the rate of increase was influenced by the 4.1% rate of inflation for 2021.

James Carthew is a co-founder and head of investment companies research at QuotedData. Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances, objectives and attitude towards risk.