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The next generation of dividend heroes

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23 March 2020

Which investment companies are approaching dividend hero status?

Following the announcement of its dividend heroes last week, the Association of Investment Companies (AIC) has released a list of the next generation of dividend heroes. These are the investment companies that have raised their annual dividends for at least ten years but less than the 20 consecutive years needed to achieve dividend hero status.

There are six new joiners to the list this year. Fidelity Special Values, Lowland Investment Company, Schroder UK Mid Cap, Law Debenture Corporation, Tetragon Financial Group and CQS New City High Yield have each grown their dividends for ten years in a row.

This means there are 25 investment companies in the next generation of dividend heroes. Aberdeen Standard Equity Income is leading the way with 19 consecutive annual increases, knocking on the door to full dividend hero status.

So far in 2020, four on the list have announced a further year of dividend hikes. At the beginning of March Murray International and Athelney announced their 15th and 16th year of increases. In February BlackRock Throgmorton announced its 16th year of dividend increases and Aberdeen Asian Income announced its 11th annual increase in January.

The 25 investment companies in the next generation of dividend heroes, combined with the 21 dividend heroes, gives a total of 46 investment companies, or 14% of the investment company universe1, that have grown their dividends for at least ten consecutive years.

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “Markets are experiencing deep falls and it’s been an unsettling time for everyone. But it’s in times like these that investment companies’ unique income advantages come to the fore. Investment companies can squirrel away up to 15% of the income they receive each year into a revenue reserve, which can help them boost dividends at times when companies in their portfolio can’t.

“Of the 25 investment companies which make up the next generation of dividend heroes, 12 have been consistently raising their dividends since before the global financial crisis.  Whilst dividends are never guaranteed, the structural benefit which has helped investment companies deliver growing dividends in falling markets should be a comfort to investors at this time.”

Comments from the new joiners

James Henderson, Co-Manager of Lowland Investment Company, said: “Over the next year, dividends will be cut, scrapped and postponed by many companies. As the circumstances demand it, it will generally be well received and often right for the long-term viability of the business and the employees, and therefore it is right for the general economy.

“Investment trusts have the ability to build up the revenue reserve in the good years to smooth the bad ones, and we now expect this to be a bad one. This structural benefit will be very attractive to shareholders at times when they experience a fall in their dividend income from direct holdings and OEICs.”  

Laura Foll, Co-Manager of Lowland Investment Company, added: “The Lowland Investment Company strategy has always been to treat dividends as an output and focus on capital growth, in other words focus on companies that have the capacity to grow sales and earnings, and therefore dividends, over the long term. This year there have already been several dividend suspensions or cuts in the portfolio and there will be more to come. However, Lowland has a substantial revenue reserve built up over many years which equates to almost 90% of last year’s dividend payment, therefore we are going into this period of weaker dividend payments in a strong position.”

Alex Wright, Portfolio Manager of Fidelity Special Values, said: “Since its launch in 1994, Fidelity Special Values has consistently employed a contrarian stock picking investment strategy. The trust focuses on unloved companies entering a period of positive change. The market is often slow to recognise change in out-of-favour stocks. This creates opportunities to add value by identifying companies whose improving growth prospects are not yet recognised by other investors. The trust’s structure allows me to invest right across the market, in terms of size (the market capitalisation) of underlying investments, although there tends to be an inherent bias towards small and mid-cap companies, which tend to be under-researched.

“Shareholders will be aware that the trust’s primary objective is to achieve long-term capital growth. However, the fact it has paid an increased dividend year on year for the last ten years is to some extent a reflection of how out of favour some of the high dividend paying companies we invest in have become. Dividends are an important consideration when assessing a stock’s future return potential. I am pleased we’re now part of the next generation of dividend heroes.”

Paddy Dear, Manager of Tetragon Financial Group, said: “Tetragon invests in a broad range of assets and aims to provide stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles. Tetragon’s investment objective is to generate distributable income and capital appreciation. To that end we believe that our consistent and growing dividends over the last ten years are evidence of our success over that period. We very much hope to be able to replicate that success over the next ten years.”

Denis Jackson, Chief Executive Officer of Law Debenture Corporation, said: “Law Debenture has a proud history of maintaining or increasing its dividend payments for more than 40 years. In 2019, we have announced a 38% increase in the full year dividend, reflecting another strong performance in our Independent Professional Services (IPS) business and from our investment portfolio.

“Looking forward, Law Debenture plans to continue to deliver gradually increasing dividend payments in excess of inflation over time. Our differentiated model benefits from IPS having contributed around a third of all dividends paid in the last ten years and gives greater flexibility in portfolio construction. We also benefit from a strong revenue reserve position and a low level of ongoing charges.”

Next generation of investment company dividend heroes

Investment company

AIC sector

Number of consecutive
years dividend increased

Yield at
20/03/2020

(%)

Revenue reserve

(Base currency)

Dividend cover

(Years)

Aberdeen Standard Equity Income

UK Equity Income

19

9.8

11,578,000

1.15

TR European Growth

European Smaller Companies

17

3.9

29,281,000

2.62

Athelney

UK Smaller Companies

16

4.8

439,598

2.19

BlackRock Smaller Companies

UK Smaller Companies

16

3.2

23,935,000

1.57

BlackRock Throgmorton Trust

UK Smaller Companies

16

2.7

11,708,000

1.43

Henderson EuroTrust

Europe

16

3.4

8,372,000

1.30

Henderson Smaller Companies

UK Smaller Companies

16

4.4

24,419,000

1.36

Artemis Alpha Trust

UK All Companies

15

2.2

2,803,000

1.42

Murray International

Global Equity Income

15

6.5

73,563,000

1.06

Witan Pacific

Asia Pacific

14

2.5

13,132,000

3.07

BlackRock Greater Europe

Europe

14

1.6

10,102,000

2.46

Edinburgh Investment Trust

UK Equity Income

14

7.6

83,213,000

1.67

Henderson European Focus

Europe

12

3.3

11,572,000

1.72

HICL Infrastructure

Infrastructure

12

5.8

See note*

See note*

Schroder Oriental Income

Asia Pacific Income

12

5.3

31,375,000

1.15

Standard Life UK Smaller Companies

UK Smaller Companies

12

2.2

10,866,000

1.41

Aberdeen Asian Income

Asia Pacific Income

11

6.0

15,026,000

0.92

Henderson Far East Income

Asia Pacific Income

11

8.4

24,992,000

0.81

International Public Partnerships

Infrastructure

11

5.4

See note*

See note*

CQS New City High Yield

Debt - Loans & Bonds

10

11.7

17,294,000

0.90

Fidelity Special Values

UK All Companies

10

4.5

24,532,000

1.17

Law Debenture Corporation

UK Equity Income

10

6.0

See note*

See note*

Lowland Investment Company

UK Equity Income

10

7.4

18,384,000

1.14

Schroder UK Mid Cap

UK All Companies

10

5.4

9,612,000

1.47

Tetragon Financial Group

Flexible Investment

10

10.4

See note*

See note*

*Source: AIC/Morningstar. Next generation of dividend heroes correct as at 23 March 2020. Where revenue reserves and dividend cover are not shown, the investment companies do not report revenue reserves separately, although they may have retained earnings.

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. 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 has 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.

-Ends-

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Notes

  1. There were 336 investment companies excluding VCTs as at 29 February 2020 and 46 of these (14%) have raised their dividends for at least ten consecutive years.
  2. 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. As at the end of February, the AIC had 362 members and the industry had total assets of approximately £196 billion.
  3. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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