Ian Cowie: dividends to the rescue during market storm

Our columnist points out that at times when stock markets are volatile, dividends pay investors to be patient – with three of his income trusts holding up well.

Dreams of capital gains can disappear in a puff of smoke - or a bit of bad news from the other side of the Atlantic, as Wall Street reminded investors this week. But dividend income can provide cash compensation for stock market volatility and pay us to be patient.

Yes, I know I have said that before - and used to be mocked for it by buyers of ‘jam tomorrow’ shares that yield no income and, instead, used to be valued solely on hopes of growth in future. When those dreams vaporised in the heat of rising inflation and interest rates, former believers were left looking as foolish as buyers of magic beans that failed to grow into the sky.

Coming down to earth with a bump, investment trusts’ ability to sustain rising dividends is more obviously valuable since the S&P 500, a broad measure of the world’s biggest economy, followed the Nasdaq, New York’s technology index, into ‘bear market’ territory this week, having both fallen by more than 20% since the start of the year.

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Let’s not be mealy-mouthed about this. At the time of writing, the Nasdaq has lost nearly a third of its value - or 32% - since 1 January. Meanwhile, shares in what was Britain’s biggest investment trust and former high-flyer Scottish Mortgage (LSE:SMT) have nearly halved, plunging by an eye-watering 46%.

Suddenly, SMT’s much-vaunted ‘concentrated portfolio’ approach - with top 10 holdings in the electric car-maker, Tesla (NASDAQ:TSLA) and Chinese tech giants Tencent (SEHK:700) and Alibaba (NYSE:BABA) - doesn’t look quite so clever any more. No wonder City cynics joke that SMT’s former manager James Anderson, who retired a few months ago, executed the best-timed exit since fellow Scot Alex Ferguson left Manchester United, when they were still winning stuff.

But I have no wish to inflict further pain on SMT shareholders. That would be cruel. While this investment trust now sits second-from-bottom in the Association of Investment Companies (AIC) ‘Global’ sector over the last year, down 44%, it remains top over five and 10 years with total returns of 75% and 487% respectively. I know which this long-term investor regards as more important.

Looking to the future, SMT’s top holding in the biotechnology business, Moderna (NASDAQ:MRNA), should benefit from an ill wind if - as seems likely - the coronavirus returns this winter. Conversely, it is unlikely the world will stop needing microchips made by ASML Holding (EURONEXT:ASML) or interactive graphics from NVIDIA (NASDAQ:NVDA); both top 10 holdings in SMT. I might even buy a few shares if the price falls much further.

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Here and now, it is notable how yielders in my own modest portfolio have coped better than non-yielders since fears of sharply higher Federal Reserve interest rates plunged the Nasdaq and S&P 500 into bear markets. For example, despite most share prices slipping lower, Tufton Oceanic Assets (LSE:SHIP), the marine transport leasing specialist that yields 6% dividend income, is up 28% over the last year, according to independent statisticians Morningstar. Launched in December 2017, it lacks a five-year track record.

Meanwhile, Ecofin Global Utilities & Infrastructure (LSE:EGL), which yields 3.4% and was launched in September 2016, has delivered total returns of 23% and 113% over the last one and five-year periods. Gore Street Energy Storage Fund (LSE:GSF), the industrial-scale batteries specialist that launched in May 2018, pumps out 6.6% dividend income and has also remained positive over the last difficult year with a total return of 18%.

As mentioned earlier, sustainable distributions are a comforting characteristic of many investment trusts in periods of extreme uncertainty. For example, when 52 out of Britain’s biggest companies cut or cancelled their dividends during the first coronavirus crisis of 2020, Annabel Brodie-Smith, a director of the AIC, told me:

“The vast majority of investment companies investing in equities have held or increased their dividends since the pandemic started, with 92% doing so and only 8% - or 14 companies - cutting dividends.

“This is quite an achievement when you look at the number of trading companies slicing their dividends and the subsequent dividend drought.

“Many investment companies have been making use of their revenue reserves, a unique income advantage over other types of fund. It enables them to squirrel away up to 15% of the income they receive each year, which means in these tough times they use the reserves to boost or sustain their dividends.”

That remains as true today as it was two years ago. Whatever happens next, investment trusts yielding decent dividends are better-placed than most to survive the Feddy bears’ picnic this summer.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Ecofin Global Utilities & Growth (EGL), Gore Street Energy Storage Fund (GSF) and Tufton Oceanic Assets (SHIP) as part of a globally diversified portfolio of investment trusts and other shares.