Chelverton UK Dividend (SDV ) will be cutting its dividend following the repayment of its 2025 Zero Dividend Preference Shares (ZDPs). The repayment leaves the £30.9m trust wholly ungeared, leading to an inevitable reduction in underlying investment income due to its smaller portfolio.

In a statement today, the board said SDV would continue to pay a 10p per share dividend, or 2.5p quarterly, for the three years to April 2028 – which represents a 7.6% yield based on yesterday’s close. This compares to a 13p figure for the previous financial year, which gave the formerly split-capital trust a nearly 10% yield.

The board added that ‘significant revenue reserves’ of £2.8m could be used to supplement ongoing distributions – effectively, that means the trust will be able to stick to its new dividend plan even if underlying income falls short. 

The news follows the previous failure of the trust to roll over its ZDPs for a fresh six years ‘due to insufficient demand’, in the context of ‘continuing challenging and volatile market conditions have not been favourable in the circumstances.’

Today, the board added it will actively ‘seek opportunities to reintroduce gearing’ as ‘market circumstances develop’. 

The trust, which invests in smaller UK companies with a focus on income, has produced disappointing returns over one and three years. Over the longer timeframe, shareholders have seen a 14.2% loss versus the positive 27.2% average total return of trusts in the Association of Investment Companies’ UK Equity Income sector, where many names have been driven by larger value stocks in areas like banking.

In today’s update, however, manager David Horner said his confidence in the growth potential of his trust remains ‘as high as it’s ever been’. 

‘Most market observers consider that the UK equity markets, of all market capitalisations, are in global terms relatively and absolutely cheap and within that the small and mid-cap segments of the market are even more lowly rated’, he said. Looking back to historical periods of rerating in the small-cap sector, he said we could expect ‘a very strong recovery’. 

On a ‘macro view’, today’s announcement also stated that lower inflation and the beginning of interest rate cuts in the UK provide an ‘accommodating backdrop’ for growth in the sector

On this topic Horner added market expectations are for further UK bse rate  cuts over the next 12-18 months, with some commentators suggesting there could be up to a further five reductions, down to 3.0%. 

‘Historically, lower interest rates are generally a catalyst for greater market activity and share price appreciation. As interest rates decline and confidence in the economy returns the future release of these cash reserves would be a major boost to GDP,’ he added. 

As of the end of March, SDV’s top holdings were newspaper and magazine wholesaler Smiths News, palm oil producer MP Evans, and life insurance and pensions consolidator Chesnara.