Investment heroes’ record proves the only way is up

Katherine Garrett-Cox, chief executive of Alliance Trust. Picture: Jane Barlow
Katherine Garrett-Cox, chief executive of Alliance Trust. Picture: Jane Barlow
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SAVERS and investors struggling to secure income since the base rate plunged to 0.5 per cent five years ago have been urged to turn to investment trusts after research underlined their consistency in paying out dividends.

New figures show that 35 investment trusts have increased the dividend they paid to investors for each of the past ten years, accounting for one in four trusts with a track record of at least a decade.

Of those investment trusts, 15 have increased their dividend every year for 30 years or more, including some of Scotland’s oldest investment names.

The latest Dividend Heroes research by the Association of Investment Companies (AIC)was published in the week that marked five years since the Bank of England cut interest rates to 0.5 per cent, a move that has left millions starved of valuable savings income.

Alliance Trust became the latest of Scotland’s investment trusts to extend its record of increasing dividends on Friday, when chief executive Katherine Garrett-Cox announced a 12.5 per cent rise that represented its 47th year of consecutive dividend growth.

The figure was reported in its annual results, where it also revealed plans to relocate parts of the business south of the Border ahead of September’s independence referendum.

The Dundee-based asset management giant is just one of several investment trusts with a decades-long record of raising the dividends paid to investors.

The City of London and Bankers investment trusts have also increased dividends for 47 consecutive years, while Caledonia has done so for 46 years and F&C for 43.

Among the others to have increased dividends for at least 30 consecutive years are Aberdeen’s Murray Income trust, the Scottish American and the Scottish Mortgage investment trusts run by Edinburgh-based Baillie Gifford and the 127-year-old Scottish Investment Trust.

Investment trusts have an advantage when it comes to dividends because their quoted status allows them to set aside up to 15 per cent of their income in a reserve each year, allowing them to maintain dividend payments during leaner times.

“This feature has enabled many investment companies to increase their dividends to meet the needs of income investors through thick and thin,” said Annabel Brodie-Smith, communications director at the AIC.

“With interest rates still at record lows, investment companies’ ability to consecutively increase dividends has become a much appreciated feature of the sector.”

Michael Clark, portfolio manager at investment house Fidelity, believes the outlook for dividend growth is positive. “The uncertain economic environment of recent years, which began with the very deep recession of 2008 and the low rate of growth subsequently, has meant that companies have stockpiled cash, unwilling to expand by investment or by acquisition,” he said.

“Companies have therefore been run conservatively, balance sheets are in good shape, and there is plenty of cash flow for dividends.”

And Tom Munro, owner of Tom Munro Financial Solutions, points out that such dividends are crucial in providing a regular income for ordinary investors, not least at a time of low interest rates.

The value of dividends lies not only in the regular income payments, but also in the power of compounding. Reinvested dividends are the biggest single component of investment returns, estimated to account for more than 40 per cent of equity growth over the typical ten-year period.

“Investors looking to generate additional regular income out of their savings have had to endure five years of derisory interest rates, as well as the shock of witnessing previous high dividend paying companies like BP and the banking sector cut dividends,” said Munro.

“With yields ranging between 3 and 5 per cent, with the added advantage of holding in an Isa wrapper, investment trusts are an excellent long-term option for the basic, and especially the higher rate taxpayer.”