Fantastic four investment companies join the next generation of dividend heroes

Following the announcement of the dividend hero investment companies last week, the Association of Investment Companies (AIC) has released an updated list of the next generation of dividend heroes. These are the 26 investment companies which have increased their dividends for 10 or more consecutive years but less than 20.

Four investment companies join the next generation this year, having achieved a decade of consecutive annual dividend increases. The new joiners are: Dunedin Income Growth, Fidelity China Special Situations, North American Income and Lindsell Train.

Athelney leads the next generation of dividend heroes, having increased its dividend for 19 consecutive years. It’s closely followed by BlackRock Smaller Companies (18) and Henderson Smaller Companies (18) with Artemis Alpha Trust (17) and Murray International (16) coming next. Three investment companies have 15 years of dividend increases: Henderson Far East Income, BlackRock Greater Europe and Schroder Oriental Income.

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “Investment companies’ structural advantages have contributed to their strong and consistent income record in difficult market conditions. The ability to hold back up to 15% of the income they receive each year to boost income for shareholders in tougher times really delivers for investors. These income benefits helped four investment companies join the next generation of dividend heroes this year as they continued to pay out rising dividends to shareholders.

“In volatile markets it’s always reassuring to see the impressive track records of the dividend heroes and next generation of dividend heroes. However, it’s important to remember that dividends are never guaranteed.”

The next generation of investment company dividend heroes

Source: AIC/Morningstar. Data as at 16/03/2022

Reactions from the four new joiners

Ben Ritchie, Co-Manager of Dunedin Income Growth, said: “We are delighted to be named amongst the next generation of dividend heroes and it reflects well on the progress the trust has made in recent years with its renewed focus on both dividend growth and sustainability. Longer term, we absolutely aspire to full dividend hero status!”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “At the launch of Fidelity China Special Situations, it was envisaged that returns for investors would come from capital growth. Nevertheless, we have been able to increase the dividend per share every year since the company launched in 2010. With interest rates being low, the board and I recognise that the dividend has become a more important part of the total return to shareholders. I am therefore delighted the company has been recognised among the next generation of dividend heroes by the AIC.”

Fran Radano, Manager of North American Income, said: “We strive to create a portfolio with growth characteristics whilst paying a progressive, covered dividend. Thus, we are pleased that the North American Income Trust has been recognised in the next generation of dividend heroes. We believe that we have built a high quality, all-weather portfolio that should continue the past trends and eventually be able to join the longer tenured trusts that have received the ultimate designation of dividend hero.”

Nick Train, Manager of Lindsell Train, said: “We are delighted that the Lindsell Train Investment Trust has been identified as a next generation of dividend hero! We would however highlight that the trust’s policy is to pay annual dividends consistent with retaining the maximum permitted earnings (in accordance with investment trust regulations), so we are not specifically targeting rising dividends. But we have been fortunate to see the companies in which the trust invests (and particularly the holding in the private company Lindsell Train Limited) reward us with strong dividend growth over this period. Of course, there is no guarantee that this will continue into the future.”

New and recent joiners on their investment strategy and dividend policy

Peter Hewitt, Manager of BMO Managed Portfolio Trust, said: “Our strategy focuses on each individual holding, understanding the shape of the balance sheet and the magnitude of revenue reserves. Also, our strategy incorporates the attitude of the board, particularly how much do they really want to increase the dividend in difficult times. We have a mix of holdings between exposure to UK equity income and global/Asian income trusts. Alternatives can play a useful part too as their dividends are much less sensitive to the direction of equity markets. A modest level of gearing can also enhance the ability to pay higher dividends to our shareholders.

“Finally, and unique in the investment company sector, is the income transfer mechanism between the growth and income portfolio of Managed Portfolio Trust. Over the 14-year history of the Managed Portfolio Trust, this has proved extremely helpful to the income shareholders and has boosted the yield by around 1% each year. It has also meant that as the investment manager, I have never had to go up the yield spectrum in search of ever higher dividend yields. Very high yields are there for a reason and mean higher risk. Managed Portfolio Trust has never had to do this. The core of the portfolio is exposure to equity income.”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “We’re looking to achieve long-term capital growth for clients by identifying companies which are most likely to benefit from China’s growth and changing economy. The growth of the middle class and a refocusing on China’s economy towards domestic consumption will be key drivers of its economy and stock market in the coming years; we therefore focus on those products and services that cater for this growth within China.”

Fran Radano, Manager of North American Income, said: “Our investment process seeks to build a best ideas portfolio of high quality, cash generative North American companies with both growth and income characteristics that allows us to pay our shareholders a progressive, covered dividend. We believe that companies that are able to pay progressive dividends in all types of market environments are well positioned to be market leaders and these are companies that drive the total return of the North American Income Trust. Dividends have accounted for over half of the total return in the North American market over time, and seeking those companies with consistently strong cash flows and robust balance sheets should allow us to provide competitive returns over the long term.

“Our investment process was tested in 2020 and we only held one company in the fund where the dividend was cut – and that was only 14%. Additionally, a conservative, surgical use of options allows the trust another tool to potentially grow income over the long term.”

Ben Ritchie, Co-Manager of Dunedin Income Growth, said: “Our strategy is to build a concentrated portfolio of high-quality UK and European companies that meet our sustainable and responsible investment criteria and which we believe can deliver both real income growth and attractive total returns over the long term. By looking to balance yield today and growth tomorrow we believe we put ourselves in a good position to be able to consistently grow the trust’s dividend.”

Sam Morse, Portfolio Manager of Fidelity European, said: “The company recently celebrated its 30th anniversary. An investment of ten thousand pounds in the company, at launch in 1991, would now be worth as much as half a million pounds assuming all dividends received had been reinvested, an annualised total return of almost 14% per annum in sterling terms. It serves to highlight that compounding really is the eighth wonder of the world as Albert Einstein once said. Reinvested dividends are an important aspect of total shareholder return, and hopefully all shareholders remember to reinvest dividends if they don’t need the regular income.”

New and recent joiners on where they’re seeing opportunities

Fran Radano, Manager of North American Income, said: “The current market environment has largely been beneficial to dividend focused investors year to date, albeit a market that had not been so kind to us over the past few years! The volatility on a day-to-day basis has given us opportunities to top up existing holdings and companies have been emboldened to grow their dividends at above trend rates after a period of more conservatism.”

Ben Ritchie, Co-Manager of Dunedin Income Growth, said: “These are challenging market conditions, but they are offering the opportunity to add capital to existing holdings where valuations are looking attractive and future dividend growth rates are high relative to the wider market.”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “It’s been a volatile period for China and the global markets in recent months, but we have seen times like this before, and most likely will see them again. While uncertainty may be with us for some time, the market overall is trading on a price earnings multiple that is attractive relative to history and relative to other stock markets globally. History teaches us that these are usually the periods that offer the most attractive opportunities.”

Peter Hewitt, Manager of BMO Managed Portfolio Trust, said: “There are quite a lot of opportunities currently in UK equity income and global equity income. An area where I have been increasing exposure for the trust is with some specialist property trusts that are offering attractive yields with potential to grow. The wider alternative space also has some interesting opportunities currently.”

Dividend information

Full dividend information on each investment company is available on the AIC’s website www.theaic.co.uk. The website shows each investment company’s revenue reserve in the ‘Dividends’ tab. This is the income which has been retained by an investment company which can be used to support dividends in more difficult years. The website also shows each investment company’s dividend cover. This shows how many years the current revenue reserve could pay the investment company’s last full financial year of dividends.

The AIC’s website also offers Income Finder, a suite of tools and resources to help income-seeking investors research investment companies. Investors can build a virtual portfolio of income-paying investment companies, track dividend dates and see how much income they could have received over a year.

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Notes to editors

1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 361 members and the industry has total assets of approximately £265 billion.
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