Investment Trusts

Investment trusts: dependable dividends during the crisis

Many investment trusts have committed to or even increased dividends recently, despite the ongoing economic crisis – Peter Hewitt explains why.
July 2020

Peter Hewitt

Director, Portfolio Manager, Multi Asset Solutions

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Risk Disclaimer 

Capital is at risk. The value of an investment is dependent on the supply and demand for the trust’s shares rather than its underlying assets. The value of the investment will not be the same as the value of the trust’s underlying assets.

Past performance should not be seen as an indication of future performance. Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The government-induced lockdowns over the past few months have caused severe restrictions on business activity. With such sharp downturns during the past few months and the looming global recession, many companies have either cancelled or at least suspended their dividends, and the effects on shareholders are significant – not all are happy to support businesses under stress if they’re relying on that dividend for their own income. Take Shell as a particularly famous (or rather infamous) example, which in a dramatic move in April cut its dividend for the first time since WWII and now faces resentment and scrutiny from some of its top investors.¹

Risk Disclaimer

Capital is at risk. The value of an investment is dependent on the supply and demand for the trust’s shares rather than its underlying assets. The value of the investment will not be the same as the value of the trust’s underlying assets.

 

While some investment vehicles such as unit trusts and OEICs might currently be under pressure from companies’ decisions to forgo shareholder dividends, investment trusts are proving relatively more reliable at providing consistent income streams through the current crisis. For example, BMO Capital and Income Investment Trust recently increased its dividend to maintain its position as an AIC Dividend Hero. Compared with the same half-year period last year, the dividends increased by 2%. Similarly, BMO Global Smaller Companies announced in June its dividend will increase by 3%, marking its 50th consecutive year of dividend increases, while TR Property recently announced a 3.7% increase in the dividend for the year, equating to an approximate 97% payout ratio of the income received over the year.       

 
The role of revenue reserves

Currently, income reliability for many investment trusts is largely thanks to revenue reserves – the up to 15% of revenue generated that investment trust managers can store away for a rainy day to ensure consistent income streams for investors. And it certainly seems that the current climate has been not just a downpour but an outright thunderstorm.

In fact, 1.3% of revenue reserves were drawn as part of BMO Capital and Income Investment Trust ’s dividend payment noted above, with the current market conditions seen as an appropriate time to tap into this valuable resource for shareholders. The Chairman acknowledged the reliance of some shareholders on the growth in income from this trust, which is a key consideration in the way the portfolio is managed.

BMO Managed Portfolio Trust has enough built up in revenue reserves to pay out dividends for two-thirds of the year, which allowed it to maintain the fourth-quarter dividend and offer shareholders a yield of 5.2%, after growing it at around 3-4% in the previous three quarters. Last year, the trust paid out 6.1p per share while earning 6.6p, and it was this 0.5p difference that we put away in the reserves. And of the underlying trusts within the portfolio, City of London Investment Trust has enough reserves built up to keep paying out for nearly a year, providing some comfort in these challenging conditions. It intends to increase its dividend for the 54th successive year – the longest unbroken run for any investment trust.

 

Upcoming announcements

Typically, the older and more established a trust, the larger revenue reserves it is likely to hold. And F&C Investment Trust certainly has good reserves built up; we will find out in late July whether the board will approve its 50th consecutive increase in dividends.

Past performance should not be seen as an indication of future performance. Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

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