‘Alternatives’ drive record year for investment trust dividends

Venture capital, renewable energy and property contribute to 15% payout increase.

Investment trusts paid a record amount in dividends in the year to 31 March, fuelled by higher payouts from “alternative” sectors, such as renewable energy and property.

This is according to Link Group’s latest Investment Trust Dividend Monitor, which calculated that trusts paid out £5.5 billion in the 12-month period, up 15.4% year on year.

Investment trusts buying listed stocks held payouts flat at £1.85 billion but alternative investments saw payouts jump 25.1% to £3.65 billion. 

The biggest increase the booming alternatives sector came from Venture Capital Trusts (VCTs), which handed out £556 million between April 2021 and March 2022, up 65.7%.

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Meanwhile, renewable energy infrastructure funds paid their shareholders £583 million, up 38.3%. Along with property, which is the largest dividend-paying sector in the alternatives segment, these categories accounted for four-fifths of the overall increase in dividends in the 12 months to the end of March 2022.

In 2010, alternative categories of investment trusts contributed less than a third of the dividends paid by the sector overall. In 2021 they contributed two-thirds. Their payouts were nine times larger in 2021 than in 2010, according to Link Group.

Trusts that invest only in listed equities were impacted by the cut in global payouts that accompanied the first year of the pandemic.

Even so, the peak-to-trough decline in dividends from equity investment trusts was only 1.9% as trusts dipped into reserves and took advantage of special rules that permit them to distribute some of their capital gains. The use of reserves continued in the second half of 2021 but at a much-reduced rate.

Over the next 12 months, Link Group expects dividends from all investment trusts to rise 4% to a total of £1.92 billion.

This is slower than either expected dividend growth in the UK or globally, but reflects the fact that investment trust payouts were shielded from wider dividend cuts in 2020-21 and trusts are now rebuilding reserves.

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There are a number of alternative and equity investment trust dividend stalwarts on interactive investor’s Super 60 list of recommend funds.

These include “dividend hero”, with 55 consecutive dividend raises, City of London (LSE:CTY), and property investors TR Property (LSE:TRY) and BMO Commercial Property Trust (LSE:BCPT). They yield 4.8%, 3.7% and 4.1% respectively.

Ian Stokes, managing director at Link Group, says that investment trusts are an “interesting” proposition for income investors for three reasons.

“First, they are able to invest almost anywhere in the world. Second, they can invest in different asset classes beyond just listed equities, enabling access to hard-to-reach opportunities such as private equity or venture capital.

“Third, they are able to borrow modestly, using debt to buy more underlying assets, thereby enhancing returns to shareholders over the long term (this is known as gearing). And finally, many of them have reserves that they can draw on in bad times to cushion their shareholders when dividends from the companies they invest in go down.”