Ian Cowie: six dividend hero trusts for inflation-busting income

The ‘super six’ are yielding more than four times the rate of inflation.

Six super investment trusts are yielding more than four times the rate of inflation after they increased the income they pay shareholders every year for more than two decades. Perhaps even more surprisingly, one of them is still trading at a 20% discount to its net asset value (NAV).

Now that rising numbers of people must rely on income from the stock market to pay for retirement, this new research by the Association of Investment Companies (AIC), exclusively commissioned for interactive investor, shows how it is possible to ‘do the double’ with dividends. Inflation-busting income can still be obtained today from investment trusts that have pumped up payouts for more than 20 years.

For example, Aberdeen Standard Equity Income (LSE:ASEI) has increased its dividends in each of the last 20 years, according to Morningstar. But it continues to pay income equal to 5.9% of its current share price after delivering total returns over the last year, five years and decade of 40%, 9.2% and 79%.

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ASEI’s top 10 assets are led by the spread-betting specialist, CMC Markets (LSE:CMCX), and also include the minersRio Tinto (LSE:RIO) and BHP (LSE:BHP), plus the commodities trader Glencore (LSE:GLEN). This £203 million investment trust’s share price is 6.9% lower than its NAV.

Value and Indexed Property Income (LSE:VIP) also yields 5.9% after raising its dividends every year for the last 33 years. Total returns over the three standard performance periods mentioned earlier are 36%, 19% and 64%, but VIP trades 20% below its NAV.

The double-digit discount on this £175 million trust may be explained by its presence in the AIC’s deeply unfashionable Property: UK Commercial sector. Industrial real estate, pubs and supermarkets account for 35%, 24% and 16% of its property portfolio respectively.

Merchants (LSE:MRCH) yields 5.4% after raising dividends every year for 39 years and delivering total returns over the three standard periods of 45%, 62% and 106%. This heavyweight £730 million trust trades at par - or equal to NAV - and a diversified portfolio includes GlaxoSmithKline (LSE:GSK), Royal Dutch Shell (LSE:RDSB) and WPP (LSE:WPP). Unfortunately, at least from my point of view, there are also big slugs of tobacco and armaments.

City of London (LSE:CTY) is even bigger and better known, with total assets of £1.8 billion. It yields 4.9% after increasing shareholders’ income continuously for 54 consecutive years. Both remarkable numbers and total returns of 23%, 31% and 100% have helped lift the share price 2.5% above its NAV. Apart from the premium, another disadvantage - at least to this former smoker - is its biggest underlying holding; British American Tobacco (LSE:BATS).

JPMorgan Claverhouse (LSE:JCH) yields 4.3% income, despite raising dividends for 48 consecutive years and delivering returns of 37%, 58% and 127%. Those numbers make a modest discount of 1.5% look like a bargain. Alongside top 10 holdings in RDSB, RIO and BHP, this £528 million trust also holds BATS.

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Schroder Income Growth (LSE:SCF) yields 4.1% and has raised shareholders’ income for 25 consecutive years. Like MRCH, SCF trades at par after delivering total returns of 37%, 54% and 121%. Its top 10 holdings are tobacco-free and led by the insurer Legal & General (LSE:LGEN), followed by pharmaceutical giants AstraZeneca (LSE:AZN) and GSK. This £228 million trust also includes among its biggest positions the usual suspects BHP, RIO plus the food and drink giant Unilever (LSE:ULVR).

All the super-six investment companies above comfortably beat the government’s official measure of inflation - the consumer prices index or CPI, which rose by 1% over the last year.

Annabel Brodie-Smith, a director of the AIC, told me: “Investment companies have a vital income advantage which helps them deliver consistently rising income.

“That’s the ability to retain up to 15% of the dividends they receive from their portfolio in their revenue reserve. This means investment companies can save income in good years and use these reserves to boost their dividends when times are tough.

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“The power of this structural benefit was very evident last year. More than four-fifths of income-paying investment companies that invest in equities were able to increase or maintain their dividends to investors despite the huge dividend disruption caused by the pandemic. In contrast, under a quarter of equity-income paying open-ended funds increased or maintained their dividends.”

Sustainable, rising income is an important advantage for people relying on investments to pay for retirement. When it comes to pension planning, consistency over the decades is more desirable than enjoying a feast one year and then having to endure a famine the next.

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

Ian Cowie does not own any of the shares above. Yet.