Jeff Prestridge: why I love income shares and these dividend heroes

UK companies pay some of the best dividends in the world, but they’re not the only source of income. Our columnist explains his approach to investing and income hunting.

Although I’m not a pedant on the investment front, or a myopic investor, I do prefer shares and funds that pay an income – a dividend, a regular ‘divi’ – rather than gung-ho growth stocks. Gently, gently rather than wham-bam.

Contrary to what some say, I am currently not thinking about retiring (someone kindly called me a dinosaur the other day which cheered me up no end). As a result, I continue to use the income generated by my investments to buy more shares. Accumulate and accumulate again – before decumulating.

• Invest with ii: Open a Stocks & Shares ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA

Of course, there will be a time when the dinosaur wants his dividend income to flow into his bank account so he can enjoy retirement or semi-retirement (journalists never retire) without the wolves barking at his door. When that moment comes, he will simply turn the dividend tap on and let the income flow.

Some may argue that dividends are a curse and a reflection of everything that is currently wrong with UK plc. Profits driven, shareholder-obsessed and customer disinterested.

It’s an argument that does occasionally keep me awake at night, especially after I have (yet again) berated the banks for widening the gap between the interest rates they charge borrowers and the rates they pay savers. After all, it’s the chasm between mortgage and savings rates that ultimately deliver the profits which fund the dividends that keep my ISA and pensions (and your ISA and pensions) ticking over quite nicely.

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Yet, I don’t think our society would function properly without dividends. They are an integral piece of our personal finance jigsaw. We need and depend upon them. Our pensions wouldn’t work without them.

As a fan of collective investments, I particularly like investment trusts when it comes to income. This is because of their ability to nurture the income they receive from their portfolio of investments – sometimes holding a little back in reserve (a maximum 15%) when investment income is pouring in like Niagara Falls - occasionally dipping into reserves when income flows are low so that shareholders can still get a reasonable income.

This smoothing process has resulted in a cluster of investment trusts (both UK and globally focused) building records of sustained dividend growth going back many years. Some currently provide dividend yields equivalent to more than 4% a year. The likes of abrdn Equity Income Trust (LSE:AEI) (6.5%); Henderson High Income (LSE:HHI) (5.8%); Lowland (LSE:LWI) (4.8%) and JPMorgan Claverhouse (LSE:JCH) (4.7%). Nearly all pay quarterly income.

According to the Association of Investment Companies (a trade body representing the vast majority of investment trusts), 18 stock-market listed trusts have grown their dividends each year for at least 20 years (some, such as City of London (LSE:CTY), Bankers (LSE:BNKR), Alliance (LSE:ATST), Caledonia, Global Smaller Companies (LSE:GSCT), F&C (LSE:FCIT) and Brunner (LSE:BUT) – more than 50 years).  A further 27 have grown their annual dividend for at least each of the past 10 years.

Pretty impressive, given what has been thrown at markets over some of these time spans – lockdowns, Brexit (in the case of the UK) and cataclysmic global financial crises. For a list of these AIC-labelled dividend heroes (current and next  generation), have a little gander here.

One of the managers of these dividend hero trusts told me recently that such income-orientated trusts may be dull, but they’re now very much back in vogue. My view is that they have never been out of fashion. They’re like Chelsea boots, always popular come rain or shine.

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The dividend heroes are not the only income funds worthy of selection. Far from it. Plenty of equity income investment funds have splendid track records worthy of consideration.

Among them is M&G Global Dividend, a £2.3 billion fund, which has grown its income every year since it launched in 2008. No mean feat given that its fund (as opposed to an investment trust) structure prevents it from squirrelling away income in the good times to pay out in more challenging circumstances. It has to pay out income promptly by way of quarterly dividends.

I met Stuart Rhodes when he launched the fund – and was impressed with his clarity of thought. He’s done a splendid job. Last month I caught up with him again and he hasn’t changed. He told me: “I am pleased and proud of what has been achieved on the income front. We have stayed constant in terms of what we do and never veered off course.” He added: “It is a pretty healthy dividend outlook out there.” Reassuring words – and backed by the latest data from Janus Henderson, which shows that global dividends grew 8.4% in 2022.

Also, there are now a number of investment funds generating income from a range of alternative assets – whether it’s electricity storage units, solar and wind energy, or infrastructure. Although they are not everyone’s cup of tea, they are worth considering by those looking for a steady income, although the scope for additional capital return is more limited.

My Dad (God bless him) always said that variety is the spice of life. This maxim applies to the dividend world. Diversify your income sources. Buy a selection of income funds and trusts – global equity income, UK equity income and alternative income.

Gently, gently. Happy income hunting.

Jeff Prestridge is group wealth and personal finance editor, DMGT.