The ability to ‘reserve’ a proportion of their income, and thereby smooth dividend payouts over time, has always been one of the most attractive features of investment trusts – this video explains why they merit serious consideration, particularly for the income-seeking investor.

Transcript

For income-seeking investors, investment trusts have always represented an attractive proposition, not least because of their ability to smooth their dividend payouts over time. Closed-ended funds can retain up to 15% of their income each year, holding it in a ‘reserve’ to fund future dividends should the investment climate become more challenging. Since 2012, trusts have also been permitted to pay dividends from capital.

The Association of Investment Companies publishes data on the dividend cover for every trust, in order to indicate how sustainable the payout might be. Many trusts have between one and two years’ worth of reserves, giving them a degree of flexibility, whilst others have substantially more – over 15 years’ in some cases.

Consequently, many trusts can demonstrate a lengthy track record of rising dividends, though not all can, including a number of periods which featured serious market downturns, such as the dot.com bubble of 2001 and the global financial crisis of 2008.

The AIC’s annual list of ‘Dividend Heroes’ – those which have increased their payouts for 20 years or more – shows that currently, 21 trusts (from a total of around 350) have achieved this accolade, with four trusts able to demonstrate rising dividends for over 50 years, of which two are managed by Janus Henderson: The City of London Investment Trust and The Bankers Investment Trust.