The 2022 line-up of ‘next generation’ trust dividend heroes

Of the investment trusts waiting in the wings to become ‘dividend heroes’, 13 of them have a dividend yield of over 4%.

Investors on the lookout for consistent income payers could turn to the next generation of investment trust dividend heroes.

As reported last week 17 investment trusts have raised their dividends for at least two decades. Seven have upped payouts for more than 50 years.

Waiting in the wings to become ‘dividend heroes’ are 26 trusts that have increased dividends for 10 or more consecutive years, but less than 20.

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Overall, there is more choice in terms of attractive yields among the next generation of investment trusts compared to the old guard - 13 trusts in the table below have a dividend yield of over 4%. Among the more established dividend heroes, which have raised payouts for at least 20 years, just eight have yields of 4% or more.

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Topping the list, with yields of 8.4% and 8.3%, are CQS New City High Yield (LSE:NCYF) and Henderson Far East Income (LSE:HFEL). The former invests in high-yielding bonds, while the latter targets companies with high and sustainable dividends in the Asia Pacific region.

The third highest-yielder is Chelverton UK Dividend Trust (LSE:SDV), at 6.2%. The trust backs small and mid-cap companies – targeting yields of at least 4%.

Overall, there are 12 trusts investing in UK shares that have raised dividends between 10 and 20 years. Four have dividend yields in excess of 4%: Lowland (LSE:LWI), JPMorgan Elect Managed Income (LSE:JPEI), Dunedin Income Growth (LSE:DIG) and Athelney Trust (LSE:ATY).

Another difference between the up-and-coming dividend heroes and the old guard is more variety in terms of investment sectors. Asia Pacific, Europe, China and Infrastructure all feature among next generation dividend hero trusts. For trusts that have increased payouts between 20 and 55 years, UK and global strategies dominate.  

Joining the 2022 next generation list are four trusts. Each have notched up a decade of dividend increases: Dunedin Income Growth (LSE:DIG), Fidelity China Special Situations (LSE:FCSS), North American Income Trust (LSE:NAIT) and Lindsell Train (LSE:LTI).

Compared to last year just one trust has lost its place on the list – HICL Infrastructure (LSE:HICL).

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Bear in mind that some of the trusts on the list place a much greater emphasis on growth over income, including Lindsell Train. As its fund manager Nick Train points out: “We are not specifically targeting rising dividends.” 

Over the past decade Train points out “we have been fortunate to see the companies in which the trust invests (and particularly the holding in the private company Lindsell Train Limited) reward us with strong dividend growth over this period. Of course, there is no guarantee that this will continue into the future.”

As ever, it is a case of looking under the investment bonnet to ascertain how the trust invests.

The consistency of a growing income stream year-on-year is one of the key advantages associated with income-focused investment trusts. Trusts can draw on a ‘dividend reserve’ account to bolster income during challenging markets. The reserves were tapped into in 2020 when dividends dried up in response to the Covid-19 pandemic, with 85% of income-paying trusts (with yields above 1%) increasing or holding dividends in 2020. 

The structure also benefited trust investors during the global financial crisis. The majority of equity income investment trusts were able to either maintain or increase their dividends, as they dipped into their reserves.

On both of those occasions the vast majority of UK equity income open-ended funds cut their dividends. Open-ended funds are required to return all the income generated by the underlying assets to investors each year.

With the revenue reserve it is easy to get the impression that it is somehow ‘ring-fenced’. But that’s not the case. In reality, it amounts to little more than an accounting tactic, an entry in the books to show retained revenue. That money is part of the trust’s net asset value and is invested in the same way as the rest of the portfolio. If some of it is needed to top up dividend distributions, then the manager has to sell holdings or dip into the cash element and the net asset value (NAV) is affected. 

The 'next generation' of investment trust dividend heroes 

Source: Association of Investment Companies and Morningstar. Data to 16 March 2022.