Dunedin Income Growth (DIG)

18 December 2025

Disclaimer

This is a non-independent marketing communication commissioned by Aberdeen. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Kepler

Invests in high-quality UK companies, overlayed with a sustainability framework.

Overview

The most significant development for Dunedin Income Growth (DIG) this year has been the board’s introduction of an enhanced Dividend policy. Dividends will now be funded from both income and realised capital, rather than being tied predominantly to the portfolio’s natural income generation. The board has committed to a minimum dividend of 6.0% of NAV (based on the NAV as at 31/07/2025) for the financial year ending 31/01/2026, equivalent to at least 19.1p per share, a 34.5% increase year-on-year, implying a yield of around 6.4% based on the current share price. Annual income and realised gains will provide the primary funding source, alongside revenue and capital reserves of £298m, underpinning the distribution for the long-term. Additionally, funding from both income and capital gives the managers greater flexibility to focus on total-return generation.

Despite this, the investment process remains unchanged. Managers Ben Ritchie and Rebecca Maclean continue to target high-quality companies with durable cash flows, strong balance sheets and supportive long-term growth characteristics. Combined with the trust’s sustainability framework (see ESG), which blends exclusions, positive allocation and active engagement, this keeps the portfolio anchored in fundamentals whilst maintaining responsible positioning.

Portfolio activity over the past year has reflected the opportunities emerging in a historically undervalued UK market. The managers have added to areas where valuations appear to underappreciate cash-flow durability and long-term compounding potential, particularly across smaller companies, with new positions including Kainos and XPS Pensions Group.

Performance over the 12 months to 15/12/2025 was mixed. A positive NAV total return of 9.7%, was supported by strong contributions from Prudential and Chesnara, though in relative terms, DIG lagged the FTSE All-Share Index’s 19.9% return, reflecting style headwinds and lack of exposure to stocks outside its quality and sustainability criteria.

At the time of writing, DIG trades at an 7.6% Discount, wider than the five-year average of 5.9%.

Analyst’s View

We believe DIG offers a compelling route into the UK equity market, particularly for income-focussed investors, with the enhanced dividend policy the most notable development this year. Committing to a minimum 6% of NAV and drawing from both income and realised capital provides a materially higher yield, whilst giving the managers greater freedom to target total-return opportunities. This shift may broaden the trust’s appeal, and as sentiment improves or awareness of the new policy grows, we see scope for the discount to narrow.

The managers’ investment strategy remains unchanged, centred on a concentrated portfolio of high-quality companies with robust financials operating in structurally growing markets. The trust is overweight smaller companies, reflecting conviction in the long-term opportunities available in this segment of the UK market. This positioning aims to capture undervalued growth and improve returns, whilst maintaining downside resilience through strong balance sheets and cash generation. Meanwhile, the valuation premium of DIG’s quality income holdings versus the wider UK market has compressed to levels not seen for many years, signalling a potentially compelling valuation opportunity.

That said, this same positioning has weighed on performance over the past five years. DIG’s quality-growth, sustainability-aligned approach has struggled in periods where large-cap value and cyclical sectors, such as banks and defence, have dominated market returns. Nevertheless, these characteristics have historically provided downside resilience, and the focus on high-quality, cash-generative businesses positions the trust well for any future shift in leadership or increased focus on ESG considerations.

Overall, we think DIG’s investment process sets it apart from its peers in the UK Equity Income sector, and its enhanced dividend policy further helps position it as a genuinely differentiated option for investors seeking exposure to the UK’s long-term potential.

Bull

  • Highly differentiated approach, with a focus on quality and sustainable income, to both the peer group and index
  • Well-diversified list of UK businesses that also derive revenues overseas
  • Use of option writing gives managers greater flexibility to invest across the market-cap spectrum

Bear

  • ESG exclusions will result in underperformance if stocks and sectors associated with higher ESG risks rally
  • Exposure to mid-cap companies may bring more sensitivity to the UK economy
  • Balanced-investment approach may lag a value style-driven market