Dividend hero investment company managers share their secrets

6th October 2015


At a time when dividend cover for companies in the FTSE has moved to multi-year lows, income focussed ‘dividend heroes’ of the investment company sector share their tips…

Annabel Brodie-Smith, communications director, Association of Investment Companies (AIC), says: “This year’s pension changes means that some retirees will be looking for the additional flexibility that drawing an income from a portfolio can provide. At a time when FTSE companies’ dividend cover is low, some investment companies have been able to increase their dividend year on year for decades, thanks to the sector’s unique ability to save some of the income received each year for a rainy day – a process known as ‘dividend smoothing’. Investment companies, as part of a long-term well balanced portfolio, offer income-seekers something unique but are not for those who need a guaranteed income or cannot afford to lose any of their capital.”

Whilst investment companies can smooth income for tougher times, they will still want to be on the look-out for income opportunities.

Where are they finding them?

Julian Cane, investment manager, F&C Capital and Income Investment Trust, which has seen 21 years of consecutive dividend increases, says: “To a large extent the lows in UK dividend cover reflects the peculiarity of the main UK stock indices, which still have large weightings in the oil and commodity stocks, where earnings have fallen with commodity prices. Pharmaceutical companies haven’t helped either with weak earnings.  But as well as reflecting poor earnings for some of the largest companies, the shrinking dividend cover also reflects a general commitment to dividend growth, and from a shareholder’s perspective, that is generally a good thing.

“We have been looking for investment opportunities from those companies with much greater control of their own destinies, or where at least the background is not actively hostile.  We are naturally averse to investing in IPOs as there is generally a greedy seller and exaggerated enthusiasm from stockbrokers, but there are occasionally exceptions and we have had success identifying OneSavings Bank and Arrow Global as attractive investments.  Not only have these given us some good capital growth, but as their dividend cycles become fully established they will give attractive yields on the initial purchase price.  Of more established and larger companies, some of the UK banks have very attractive yields.  Their balance sheets have been much strengthened in recent years and as they work off the legacy of past mistakes, PPI etc., and have only fairly limited opportunities for growth, the obvious next step is for dividends to be increased.”

Simon Gergel, manager, Merchants Trust, which has seen 33 years of consecutive dividend growth, says: “We see the best value in certain mega caps, like Royal Dutch Shell, GlaxoSmithKline and HSBC, where we think dividends are sustainable and share prices have been over-sold.  Elsewhere there are stock specific opportunities, such as the exhibition and media company, United Business Media, the specialist staffing company, SThree or the construction and services company, Kier Group. All of these have good growth prospects and the potential for a re-valuation.”

Angela Lascelles, manager, Value & Income Trust, which has seen 28 years of consecutive dividend growth, says: “In volatile market conditions, such as we see every four or five years, we find opportunities to invest in growth companies at very attractive valuations and these have been the foundation of our income producing equity portfolios. An early example of this opportunity was Vosper Thornycroft, valued in the particular recession in the early 1990s on a yield of 7% with a strong balance sheet and three year order book. More recently there was a moment to buy Go Ahead Group at a price approximately half the current price. Often the chances occur in high quality companies included in the FTSE 250 Index, and these companies very reliably continue to increase their dividends year after year. There are several companies now which fall into this category of growing companies currently rated as value stocks.”

Dominic Neary, manager, Scottish American Investment Trust, which has seen 35 years of consecutive dividend growth, says: “One of the advantages of running equity income portfolios globally is that we do not have to be overly concerned by either the concentrated nature of the UK equity market or the travails of certain sectors. Because our approach is both stock driven and global, in managing SAINTS’ equity portfolio we are able to cast our net wide in the search for dependable, growing cash flows from which companies will be able to pay dependable, growing dividends. One notable source of exciting opportunities is the spread of sensors, and the huge growth in the computing power to process the information these provide.  This is benefitting holdings like Linear Technology and Taiwan Semiconductor, as well as some of our industrial holdings, such as Atlas Copco.”

Will Meadon, co-manager, JPMorgan Claverhouse Investment Trust, which has seen 42 years of consecutive dividend growth says: “When investing for income it’s so important to invest in prudent, well-managed companies which can grow profits through the current period of low inflation.  We are in a world where strong companies are getting stronger and weak companies are falling by the wayside. The dividend skies for some UK companies are certainly darkening.

“We hold a broad spread of financially strong companies which meet demanding investment criteria.  Stocks such as Imperial Tobacco, Aviva and Next have provided the trust with very healthy dividend growth this year and several investments – Jupiter, ITV, Direct Line Insurance and Synthomer – have, in addition to good growth in ordinary dividends, also paid special dividends this year.”

Investment company long-term consecutive dividend track records

Company Sector Launch date Number of consecutive years dividend increased
City of London Investment Trust UK Equity Income 01/01/1891 49
Bankers Investment Trust Global 13/04/1888 48
Alliance Trust Global 21/04/1888 48
Caledonia Investments Global 18/07/1960 48
F&C Global Smaller Companies Global 15/02/1889 45
Foreign & Colonial Investment Trust Global 01/01/1868 44
Brunner Investment Trust Global 01/01/1927 43
JPMorgan Claverhouse Investment Trust UK Equity Income 01/01/1963 42
Murray Income UK Equity Income 07/06/1923 42
Witan Investment Trust Global 17/02/1909 40
Scottish American Global Equity Income 31/12/1873 35
Merchants Trust UK Equity Income 16/02/1889 33
Scottish Mortgage Investment Trust Global 01/01/1909 32
Scottish Investment Trust Global 27/07/1887 31
Temple Bar UK Equity Income 30/12/1926 31
Value & Income UK Equity Income 31/07/1981 28
F&C Capital & Income UK Equity Income 29/10/1992 21
British & American UK Equity Income 08/01/1996 20
Schroder Income Growth UK Equity Income 09/03/1995 19
Northern Investors Company* Private Equity 27/04/1990 19
Invesco Income Growth UK Equity Income 27/03/1996 18
Aurora UK All Companies 14/03/1997 18
Threadneedle UK Select Trust UK All Companies 24/04/1953 17
Perpetual Income & Growth UK Equity Income 21/03/1996 16
Standard Life Equity Income UK Equity Income 15/11/1991 14
BlackRock Smaller Companies UK Smaller Companies 02/05/1906 12
Henderson Smaller Companies UK Smaller Companies 16/12/1887 12
Establishment Investment Trust Global 20/03/2002 12
BlackRock Throgmorton Trust UK Smaller Companies 01/12/1962 11
TR European Growth European Smaller Companies 06/09/1990 11
Athelney UK Smaller Companies 01/07/1994 11
Aberdeen New Dawn Asia Pacific – Excluding Japan 12/05/1989 11
Witan Pacific Asia Pacific – Including Japan 30/12/1907 11
Artemis Alpha Trust UK All Companies 16/10/1998 11
Henderson EuroTrust Europe 06/07/1992 10
Edinburgh Investment UK Equity Income 01/03/1889 10

*This company is in the process of realising its assets

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