Inflation is the new and growing concern for many investors. Indeed one fund manager calls it ‘the silent assassin of wealth’.
While short-term trends should not prompt any drastic moves from retail investors, there is no harm in ensuring that a portfolio benefits from a degree of inflation protection.
As discussed in more detail here, dividends can provide some of that protection. While they are obviously never guaranteed there is still greater security when an investment provides an income.
Dividends can be cut or dispensed with but they are still a more predictable portion of the total return than the capital appreciation element.
The City of London is home to some of the world’s oldest investment companies – including one called City of London investment trust. Investment trusts are funds that are listed on the stock market.
For instance, if the yield ‘takes care of’ or even beats inflation, then the hoped-for capital accumulation is all real gain. That is where the long-term dividend growth offered by some of the more venerable British investment trusts comes into its own.
In its latest list of ‘dividend heroes’ (those investment trusts that have increased dividends for 20 years or more), the Association of Investment Companies notes that 17 out of 18 of them beat inflation by growing their payouts over the last five years.
And among the next generation of dividend heroes (trusts that have raised payouts for 10-20 years), the figure is 22 of 24.
Communications director of the AIC Annabel Brodie-Smith says investment companies’ ‘ability to hold back up to 15 per cent of their income each year in a revenue reserve gives them a huge advantage in delivering inflation-busting income to investors’.
‘This means they often have dividends to draw on in years where income would otherwise have fallen short, something investors were thankful for during the pandemic last year,’ she adds.
The 18 investment companies that have raised their dividends for 20 years or more in a row.
Twenty-four investment trusts have raised dividend payouts for less than 20 years but more than 10. One is Murray International, which currently yields 4.5 per cent.
Its manager Bruce Stout calls inflation ‘the silent assassin of wealth’.
‘Whilst sharp equity market declines and violent bouts of evaporating investor confidence may grab the news headlines and be recognised as instantaneous perpetrators of capital loss, the covert decay of spending power through prices rising faster than incomes seldom attracts much attention,’ he says.
‘And why should it? For the current investment generation brought up on a diet of debt, deflation and digital disruption, inflation arguably remains an alien concept.
‘Yet … global inflation appears to be alive and well. As the world emerges from the global Covid pandemic, failure of global supply chains to keep up with extraordinary pent-up demand has fanned the flames of inflation once again.
The 24 investment companies that have raised payouts for more than 10 but less than 20 years.
‘Truly globally diversified investment trusts focusing on delivering sustainable income growth from the underlying portfolio of investments offer an increasingly attractive option under such circumstances.’
The dividend heroes with the highest yields are Value and Indexed Property Income and Aberdeen Standard Equity Income, with 5.7 per cent and 5.6 per cent respectively.
However, one should always be careful of judging on yield alone because – as with individual stocks – a trust’s yield can be inflated by a falling share price.
Meanwhile, two trusts that have hiked their payouts most impressively over the last five years are BMO Global Smaller Companies and Scottish Investment Trust, which boast annualised dividend growth rates of 12 per cent and 13.2 per cent.
IS IT TIME TO BACK EQUITY INCOME?
Equity income funds provide a similar service to income-focused investment trusts, but have fallen out of favour in recent years. But with dividends due to make a comeback they could also provide a defence against rising inflation.
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That will help to take care of inflation – although past performance is as ever no guarantee.
City of London IT is one of the four veteran dividend heroes that have raised payouts for 54 years. It’s a regular in analysts’ recommendations – and the 2.3 per cent premium on its share price indicates it is currently held in high regard.
Fans of growth-orientated vehicles, however, might be underwhelmed by the 30 per cent share price total return over five years, respectable though that is.
Job Curtis, who manages City of London, says that his trust was able to increase its 2020 dividend by 2.2 per cent, ‘partly funded from revenue reserves’.
‘This was the 8th year out of 29 that City of London has drawn down revenue reserves; during the other 21 years the revenue reserve has been added to,’ he says.
‘In general though, the outlook for dividends is improving given the reopening of the UK and overseas economies and strong economic growth.’
The JPMorgan Claverhouse IT has a 48-year record of boosting dividends, yields 4.2 per cent and can boast a five-year share price total return of 63.6 per cent.
Its manager Will Meadon concludes: ‘COVID-19 was the ultimate stress test, and many of those investment trusts with strong dividend reserves came into their own.’
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