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Investment Trust Dividend Monitor March 2021

  • Investment trusts raised payouts by 4.2% in 2020 to a record £1.88bn, despite UK dividends being down 38% and global dividends down 12.2%
  • More than three quarter of trusts (77%) raised payouts during the April to December 2020 pandemic months
  • Hefty reserves worth £1.6bn were the key to investment trust success
  • Global equity trusts performed most strongly, but European equity trusts succumbed to cuts
  • UK equities trusts saw modest growth

Investment trusts beat the global dividend drought in 2020, according to the Link Group Dividend Monitor’s special analysis of the investment trust sector. Investment trusts dished out an extra £87m in dividends in 2020, equivalent to a 4.2% annual increase. During the crisis months of April to December, more than three quarters of trusts investing in equities raised payouts or held them steady. This feat was especially impressive given that the recent Link Group Dividend Monitor showed that UK dividends fell 38% during the year, on an underlying basis, while Janus Henderson’s Global Dividend Index showed global payouts were down 12.2%.

Collectively investment trusts distributed a record £1.88bn in 2020 and have increased what they pay to investors by 123% in the last 10 years - every year without fail has shown growth.

The key to their success was the hefty reserves the sector had laid down during the good years . Just as the pandemic struck, Link’s research shows that trusts had held back £1.6bn that could be used to support dividend payouts during the crisis. This was equal to all the dividends paid in 2018, or nine tenths of the 2019 total. Link estimates that by the end of March 2021, trusts will have used £700m of these reserves as the anniversary of global lockdowns is reached. Global equity trusts had revenue reserves worth two years of dividends before the pandemic, while UK trusts had a year’s worth.

Over the full year, the main global equity sector accounted for a third of the dividend growth from all investment trusts. They raised dividends by 9.3% despite global dividends falling 12.2%. Global trusts held large revenue reserves, worth two years of payouts so they had a healthy cushion.

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  1. Special rules permit investment trusts to hold back 15% of the dividends they earn each year from the companies they hold in their portfolios.
  2. As at 31/3/20, investment trusts had revenue reserves of £2.2bn. Just over a quarter of this was needed to pay final dividends for 2019/20, leaving clean reserves of £1.6bn.

Trusts investing in UK equities, easily the largest paying sector, raised payouts by 3.8%, in stark contrast to the 38% underlying decline in UK dividends. They contributed three tenths of the overall increase in investment trust dividends for the full year. They did not all escape unscathed, however. From April onwards, a quarter of UK equities trusts chose to cut payouts in the face of the sharp reductions in income they were seeing from the companies they invest in. Among the regional trusts, the best performance came from emerging markets and Japan. Not only were growth rates good, but they were less prone to cuts too. Trusts focused on Europe were less successful. Large cap European trust dividends fell 18% (a cut of £17m) as, after April, three quarters of trusts in the sector cut their payouts.

Susan Ring, CEO of Link Group UK said: “The more internationally diversified trusts are, the less they have been exposed to the steepest dividend cuts. Global trusts have big reserves and have seen a relatively small reduction in the dividends paid to them by the companies they hold. Continued dividend growth is likely this year from this group. Asia-Pacific and Japanese regional trusts are focused on parts of the world where the economic impact of the pandemic has been less severe so these too should hold relatively firm. Elsewhere, European trusts cut early so we do not see significant further downside from them. Trusts focused on UK equities are more vulnerable. They still enjoy the cushion of long-accumulated reserves, but prudence suggests some cuts are likely as dividends from UK companies are going to take some time to regain previous highs.”

Ian Sayer, CEO of the Association of Investment Companies said: “Investment trust investors, particularly those in retirement, often value consistency above all else when it comes to the income they expect from their holdings. There is no doubt the sector has delivered that over the last decade and has proved its mettle in the 2020 crisis too. The oldest, most established investment trusts have had decades to build up revenue reserves and this is serving them well now. Of course, although we expect resilience overall, investment trusts are not immune to the pandemic. Independent boards across the industry are discussing with fund management teams how best to weather the dividend drought. Some trusts have cut their dividends and we may yet see more follow suit. Boards will want to be sure the long-term interests of the investors are protected.”

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