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Income-seeking investors may finally see the light at the end of the tunnel

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2 October 2015

David Prosser analyses whether dividend pay-outs could be on the rise.

Is there finally some light at the end of the tunnel for income-seeking investors? More than six years after the Bank of England cut interest rates to 0.5 per cent, those looking to generate income from their savings and investments will look back on what has been an incredibly tough period. Now, however, better times may lie ahead.

Firstly, the Bank of England continues to say it thinks an interest rate rise is possible during the first three months of next year – rates in the mortgage market have already begun edging up accordingly and it is to be hoped that the return on cash savings will rise too, once the Bank’s Monetary Policy Committee finally takes the plunge.

In this context, it was fascinating to read this week that Job Curtis, the long-serving manager of City of London Investment Trust, thinks many closed-end funds are about to raise their dividends. Many companies, particularly in the financial sector, have now recommenced or raised dividend payments, Curtis explains, swelling the earnings of investment companies with holdings in these businesses. In some cases, special dividends from companies such as Vodafone and GSK, have boosted the coffers even further.

Capita, the share registrar company, said earlier this year that 2015 would be the best year for dividend growth since 2012, estimating total dividend pay-outs would come to more than £86bn.

Investment companies are well-placed to help shareholders benefit from that trend. Indeed, City of London is one of more than 30 closed-end funds to have raised its dividend every year for at least four decades (in its case, its dividend raising record now stands at 49 years and counting).

The investment company sector has an advantage in this regard. Unlike other funds, investment companies are able to hold back some income in especially good years for dividends, in order to fund reserves that can be raided to underpin pay-outs to shareholders in weaker times. This smoothing effect is one important reason why many funds have been able to maintain a consistent upwards dividends trajectory through good times and bad.

For income-dependent investors, that’s very valuable. Anyone looking for income from their investments obviously wants a decent yield – but security of yield is equally important. If you’re relying on dividend income – in retirement, for example – you can’t afford to have it rise and fall according to the prevailing market conditions.