Monthly income dries up for investment trusts, but ‘rainy day’ reserves deliver

Updated: Research to the end of July reveals how many investment trusts have cut dividends during the coronavirus pandemic. We explain why it is not all doom and gloom.  

The coronavirus pandemic may have forced swathes of corporate Britain to cut or suspend dividend payments, but not investment trusts. Since the start of March, the majority of closed-ended investment companies have made no changes to their dividend policies.

In fact, despite the challenging backdrop, three “dividend hero” trusts, with a rich history of raising dividends, have in recent weeks either announced or pledged to increase dividends: City of London (LSE:CTY), F&C Investment Trust (LSE:FCIT)and Alliance Trust (LSE:ATST).

Figures from the broker Winterflood to 29 July show that 36 announcements have been made by trusts, explaining that they will either cut, suspend or end income payments to shareholders. But the news is not as bad as it appears.

First, 36 is a low figure compared with the number of investment trusts that pay dividends. Association of Investment Companies (AIC) data from last May showed that 249 investment companies were paying income. Therefore, the number ofdividend cuts or suspensions by trusts equatesto around 15% of those that pay dividends.

Second, looking under the bonnet of the investment trusts that have curtailed dividends, most invest in property or have a specialist focus.

A total of 16 property trusts have cut or suspended their dividends, among them BMO Commercial Property (LSE:BCPT)and Ediston Property (LSE:EPIC), two of six companies that pay a monthly dividend. BMO Commercial Property has suspended payouts, while Ediston Property has reduced its monthly dividend by 30%.

Of the other four companies that previously paid on a monthly basis: Fair Oaks Income (LSE:FAIR) and SQN Asset Finance Income have also dropped their monthly payments, while SQN Secured Income Fund announced in mid-June that it is undergoing a managed wind-down, which will result in cash being returned to shareholders.

This leaves TwentyFour Select Monthly Income (LSE:SMIF) as the current sole monthly income option for investment trust investors. It is still targeting a dividend of at least 6% per annum, payable monthly, and a net total return of 8-10% per annum.

Several real estate investment trusts have also taken action, including Alternative Income (LSE:AIRE), Custodian (LSE:CREI), Drum Income Plus (LSE:DRIP), LXi (LSE:LXI), Regional (LSE:RGL), PRS (LSE:PRSR) , Tritax Big Box (LSE:BBOX)and UK Commercial Property (LSE:UKCM). Empty office space and the closure of high streets during lockdown have made rent collection by property trusts particularly challenging. Many have opted to cut their dividends until conditions improve.

Outside property trusts, the second-biggest sector to see a notable volume of dividend changes is debt. These investment companies invest in opaque instruments, such as asset-backed secured loans and collateralised loan obligations, as well as direct lending/peer-to-peer.

Nine trusts have reduced or cancelled dividend payments, including Fair Oaks Income (LSE:FAIR) and UK Mortgages (LSE:UKML).

Next, with three dividend cuts, is an equally specialist sector: leasing. The trusts that have taken action are Amedeo Air Four Plus (LSE:AA4), DP Aircraft I (LSE:DPA), and SQN Asset Finance Income. The latter leases and loans assets to small- and medium-sized businesses, while Amedeo Air Four Plus and DP Aircraft I acquire, lease and sell aircraft.

Of the remaining trusts to have made changes to dividends, five are split across various sectors: Tetragon Financial Group (LSE:TFG)(flexible investment), Princess Private Equity (LSE:PEY)  (private equity), HICL Infrastructure (LSE:HICL) (infrastructure), GCP Infrastructure (LSE:GCP) (infrastructure), and Polar Capital Global Healthcare (LSE:PCGH) (specialist equity).

The other three that have taken action all invest in UK equities. They are British & American(LSE:BAF), Invesco Perpetual UK Smaller Companies (LSE:IPU), and Troy Income & Growth (LSE:TIGT).

The key reason why only three UK equity trusts have so far taken action on their dividends is to do with the investment trust structure, which allows trusts to put 15% of income generated each year into a revenue reserve. In challenging times such as these, when scores of UK companies have cut dividends, such reserves can be drawn on to maintain or even increase the level of income paid to shareholders.

Broker Investec Securities found that 17 UK equity income trusts it analysed at the end of March were in a position to continue paying a progressive dividend in 2020, against a backdrop of a 30% cut in dividends in the UK market as a whole.