Dividends from UK and global equities declined by 44% and 12% last year, yet 85% of investment trusts maintained or increased dividends paid to investors.
That is testament to a unique feature of the investment trust structure – the ability to hold back up to 15% of income generated in strong years to distribute to shareholders in tougher times.

At a recent Sub35 webinar on ‘Equity income and the pursuit of yield’, wealth managers heard from fund managers of two investment trusts that have continued to grow their dividends – Scottish American for 47 years and Lowland for 11 – despite the drought.

Lowland
Laura Foll, co-manager of Lowland, a UK equity income trust in the Janus Henderson stable, highlighted exposure to companies of all sizes as giving the trust a balance of defensive and cyclical sectors.

‘If there’s one thing I want you to take away about Lowland today it is that it’s multi cap, and it is genuinely multi cap – it goes all the way down to AIM,’ she said.

Exposure to large caps in the pharmaceuticals, utilities and telecommunications sectors provide ballast, while smaller companies, like those listed on the Alternative Investment Market, bring faster sales, earnings and dividend growth to the portfolio.

Although the compound annual growth rate of Lowland’s dividend per share was less than 1% last year, it has averaged 7% since 1990 – faster than the sector average.
A multi-cap approach is particularly important just now, said Foll, because it gives greater exposure to domestic economic recovery – 52% of Lowland’s revenues come from the UK compared to 25% for the FTSE All-Share index.

In selecting stocks, the managers favour market leaders that are well-managed and have a clear path to sales and earnings growth but are trading at attractive valuations due to them being unknown or unloved.

Scottish American
James Dow, co-manager of Scottish American (SAINTS for short), a Baillie Gifford global equity income trust, hailed the investment trust structure as ‘fantastic’ for income-seekers.

The trust has twin objectives – to deliver a high and dependable income stream, and to grow income and capital in real terms (ahead of inflation). ‘Even in crisis years like 2020 we want our shareholders to be able to rely on that income to be robust,’ he said. Evidence of that is that the trust last cut its dividend in 1938.

In 2020, its underlying dividends slipped 4%. It earned 11.4p per share and paid out 12p – taking 0.6p out of revenue reserves and leaving 7.1p per share in reserve. ‘We could withstand another 10 or 11 global pandemics and SAINTS would still have a revenue reserve to support the dividend,’ he said.

Like Lowland, SAINTS uses gearing – another key feature of the investment trust structure. SAINTS invests it in bonds and property that yield more than the borrowing costs.

A third and relatively underappreciated feature, according to Dow, is the long-term view that investment trust managers can take due to the closed-end structure. ‘They should not be susceptible to short-termism,’ he said.

To find out Lowland’s highest conviction holdings and SAINTS’ stock picks for the next ten years, watch the webinar.