Nearly nine in 10 investment trusts bucked the dividend cut trend

Most trusts maintained or increased dividends, while three in four cut payouts in 2020. 

The coronavirus pandemic forced scores of companies to suspend, cancel or cut dividend payments, but investment trusts bucked the trend. Figures from the Association of Investment Companies (AIC) show 85% of income-paying trusts (with yields above 1%) increased or held dividends in 2020.

In contrast, only 23% of open-ended funds increased their dividends.

Once again, this shows that investment trusts are a superior option for investors who want income consistency. Trusts can hold back up to 15% of dividends received each year, which means they can build up a reserve to bolster payouts in leaner years. In contrast, funds have to distribute all the income generated by the fund. So, when income dries up from the investments held by the fund, open-ended funds have no option but to reduce dividends.

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For the two main equity income sectors, the structural benefits of being able to dip into reserves was clear. All global equity income trusts increased or held dividends, while for UK equity income trusts it was just over nine in 10 (91%).  

For open-ended funds, however, the majority cut dividends. In terms of global equity income funds only 24% increased dividends, while it was even bleaker for investors in UK equity income funds. Just 4% of funds in the sector increased income payments.

Annabel Brodie-Smith, communications director of the AIC, says:“The fact that so many equity investment companies were able to increase or maintain dividends during such a devastating year highlights the power of investment companies’ income advantages.

“Many investment companies made use of their revenue reserves, a structural benefit unique to investment companies, which enables them to save up to 15% of the income they receive each year. Investment companies can draw on these reserves to boost payouts during difficult times, like last year.”

In recent weeks, two of the AIC’s dividend heroes, City of London (LSE: CTY) and Alliance Trust (LSE: ATST), have pledged to keep their 50-year plus dividend track records going.

City of London noted last month that “its diverse portfolio, strong cash flow and revenue reserve give the board confidence that it will be able to increase the dividend for the 55th consecutive year”.

Alliance Trust, meanwhile, said in its annual report last week that it “expects that it will continue to extend its record of year-on-year increases in dividends”.

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As well as being able to dip into their reserves, some trusts also have the flexibility, due to having shareholder approval, to fund part of their dividend distributions from capital.