The case against

One of the criticisms of an enhanced dividend strategy is that it arguably comes at the cost of long-term growth. By selling shares to pay out to investors as income, enhanced dividend strategies are effectively just returning capital to investors in another form. The argument goes that by doing so, it means managers are clipping profits and not allowing their best positions to run. This effect is particularly troubling during periods of market weakness, where managers are in effect compounding capital losses by selling assets at depressed valuations to pay dividends. Whilst the outcome of maintaining a dividend may provide comfort in the short term, it arguably damages the long-term growth potential.

Furthermore, returning capital to shareholders in the form of a dividend may have tax implications for investors. This is especially true of individuals or retail shareholders as the dividend allowance of £500 is considerably less than the capital gains allowance of £3k (as of the time of writing). However, we note that this is not an issue for those holding these assets in a tax-efficient wrapper such as a SIPP or ISA.

Do dividends determine discounts?

Despite the potential drawbacks, adopting an enhanced dividend policy can help differentiate a trust and potentially increase its appeal to a wider pool of investors. As such, one of the reasons often touted for adopting an enhanced dividend policy has been as a way of narrowing a trust’s discount. It is a tool often used as an alternative to share buybacks which might have negative effects such as reducing the size of the trust. One might argue that a narrower discount could be seen as a judgement on the debate above by the market as a whole: if the discount narrows, the pro argument has won.

To see whether enhanced dividend policies influence discounts, we have looked at the discounts of trusts using an enhanced dividend policy against the average of their peer groups. We have concentrated the analysis on trusts operating in publicly-listed equities due to the complications of other structures. Of these trusts, just over half trade at a premium to their peers, with an average discount of 1.6% narrower than the average for the peer group. This basic analysis suggests to us that an enhanced dividend policy may have a small positive impact on the trust’s rating.

ENHANCED DIVIDEND EQUITY TRUST’S DISCOUNT

trust	sector	trust discount	sector average discount	relative rating
BlackRock Sustainable American Income	North America	-12.47	-19.00	6.53
Henderson Far East Income	Asia Pacific Equity Income	3.65	-7.10	10.75
Invesco Asia	Asia Pacific Equity Income	-10.78	-7.10	-3.68
JPMorgan Asia Growth & Income	Asia Pacific Equity Income	-10.54	-7.10	-3.44
abrdn Asia Focus	Asia	-19.56	-11.50	-8.06
JPMorgan China Growth & Income	China	-13.35	-12.80	-0.55
European Assets	Europe	-12.42	-10.70	-1.72
JPMorgan European Growth & Income	Europe	-11.63	-22.00	10.37
Invesco Global Equity Income	Global Equity Income	-8.48	-4.30	-4.18
STS Global Income & Growth	Global Equity Income	-0.59	-4.30	3.71
JPMorgan Global Growth & Income	Global Equity Income	1.35	-4.30	5.65
Martin Currie Global Portfolio	Global	-2.48	-9.60	7.12
Bellevue Healthcare	Biotech & Healthcare	-8.78	-14.90	6.12
International Biotechnology	Biotech & Healthcare	-12.45	-14.90	2.45
Schroder Japan Trust	Japan	-15.63	-12.40	-3.23
BlackRock Latin American	Latin America	-13.80	-13.80	0.00
Invesco Perpetual UK Smaller	UK Smaller Companies	-16.64	-11.80	-4.84
JPMorgan UK Small Cap Growth & Income	UK Smaller Companies	-5.27	-11.80	6.53
Montanaro UK Smaller Companies	UK Smaller Companies	-11.20	-11.80	0.60
			Average	1.59

Source: Morningstar, as at 31/10/2024

However, looking at one data point is just a snapshot and can be easily affected by specifics. Therefore, to assess the change in the market’s judgement over time, we have looked at several examples of strategies that have adopted these policies and studied what has happened to their discounts in the period before and after the announcement of a new policy.

One of the most recent adopters of this policy has been JUGI. This trust is the result of a combination between the firm’s UK small-cap and mid-cap trusts in the first quarter of 2024. As part of this corporate activity, a new enhanced dividend policy was announced that sees the trust pay c. 4% of NAV per annum in four equal payments. This began in August 2024.
In the chart below, we have shown how the discount of JUGI has changed in the year leading up to the announcement on 14/11/2023 and the period since. Following the completion of the corporate activity, JUGI’s discount has narrowed significantly, leading the trust to trade at a notable premium to the sector average, and close to NAV for the first time since the market highs of 2021. In the year before the announcement, JUGI (at the time, JMI) traded at an average discount of 12.1%, at an average 0.4% discount to the peer group. In the period since, the average discount has narrowed to 8.3%, which is an average 2.7% premium to the peer group.

JUGI: DISCOUNT VERSUS SECTOR

Source: Morningstar

This has arguably come at a fortuitous time for JUGI. The enhanced dividend policy was one of a series of announcements as part of the combination, which brought benefits such as better liquidity and lower charges. It has also coincided with a period of strong performance for the trust, following a rare period of weakness as the managers’ investment style fell out of favour. However, whilst it may have coincided with a number of positive factors, the discount has narrowed following the announcement and implementation of an enhanced dividend policy.

Looking further back, we have also looked at the history of abrdn Asia Focus (AAS), an Asian smaller companies trust managed by the three-strong team of Flavia Cheong, Gabriel Sacks, and Xin-Yao Ng. The board introduced an enhanced dividend policy in 2021 to provide a higher yield to investors from an asset class not typically associated with high income. The trust already had a strong history of either maintaining or increasing its ordinary dividend, having done so every year since 1998, as well as regularly paying out special dividends. For the 2024 financial year, the trust has paid out 7.42p per share, equivalent to a yield of 2.6% based on the share price as of 30/10/2024. This is an 18% premium to the most recent published yield of the trust’s benchmark, as well as the wider MSCI ACWI Small Cap Index which yields 2.1%.

In the year leading up to the announcement of the dividend policy on 30/11/2021, AAS had an average discount of 11.6%. This was at an average discount to the sector average of 2.5%. In the year following the announcement, AAS’s average discount was actually wider at 12.6%, though this was closer to the sector average at -1.2%. This suggests that whilst the enhanced discount policy did not lead to the trust trading at a narrower discount in absolute terms, it may have improved the trust’s rating versus its peers.

AAS: DISCOUNT VERSUS SECTOR

Source: Morningstar

To see if this has had a similar effect over a longer time period, we have looked at the discount history of two trusts that have had enhanced dividend policies for many years and analysed how their discounts have fared versus peers. Firstly, here is Montanaro UK Smaller Companies (MTU). trust adopted a quarterly dividend equal to 1% of NAV in 2018, with the explicit goal of trying to increase the appeal to retail investors and therefore narrowing the discount.

Here, the impact is very stark. In the ten years before the enhanced dividend policy was declared on 25/07/2018, MTU traded at an average discount to the peer group of 4.3%, but in the six-plus years since, this has narrowed significantly, with the average discount since just 0.1%. In fact, the trust traded at a premium to the sector for much of the period, including several periods where this premium was in the double digits relative to the sector. More recently, some short-term weakness in the share price has meant the trust’s rating is currently trading in line with peers, which we would argue could be seen as an opportunity. Furthermore, as is the case with many trusts using an enhanced dividend policy based on NAV, it means the yield investors may receive is actually a little higher than the headline rate because of the discount. Whilst MTU pays a dividend equivalent to 1% of NAV per quarter, the current historic yield is 4.6% due to the trust’s double-digit discount.

MTU: DISCOUNT VERSUS SECTOR

Source: Morningstar

Our final example is EAT. As the pioneer of the approach, this trust has the longest track record available. The trust first started paying dividends from capital in 2001, which was allowed due to its dual listing in London and the Netherlands. At the time, HMRC had a rule against paying dividends from capital reserves, though this was removed in 2012, opening up the strategy to others. EAT’s management team primarily focus on mid- and small-cap European equities, though the dividend policy is to pay annual dividends of 6% of the closing NAV of the preceding financial year in four equal payments. This headline rate is nearly double that of the index at 3.1% as of 30/09/2024 and vastly ahead of its peers which range from 2.83% to 0.78% according to Morningstar.

We have shown EAT’s discount track record going back to May 2008 in the chart below. This shows that the trust’s discount has traded at a premium to the sector average for almost the entire time. Only a short period in late 2020, soon after the COVID vaccine was announced, did the sector trade at an average discount narrower than EAT. We believe this is a strong indication that enhanced dividend policies do have a positive effect on narrowing discounts. This is particularly impactful in the European smaller companies sector as there are no other trusts operating a similar approach, meaning EAT is a clear differentiator in this regard. That said, we note that EAT has slipped to a wider discount than the peer group in the past few months. This is one of the longest sustained periods of relative weakness in the past 16 years. Whilst this arguably reflects some performance headwinds, it could be seen as an opportunity for long-term investors, especially as it has pushed up the historic yield to over 7%.

EAT: DISCOUNT VERSUS SECTOR

Source: Morningstar

Conclusion

The practice of boosting the natural yield of a portfolio by paying dividends from capital is a clear demonstration of the flexibility and benefits of the investment trust structure. It increases the appeal of several asset classes to a wider range of investors and can make for useful tools for blending uncorrelated income streams as part of a wider portfolio.

Furthermore, over the long term, as we have shown it can prove useful in helping narrow a trust’s discount, especially versus peers, although it is not enough on its own to prevent wider macro factors affecting a trust’s discount. However, the wide discounts seen across the investment trust sector at present mean that the yields on offer look even more attractive due to many of them being calculated on a trust’s NAV. Moreover, the challenges seen in the wider economy have meant that many trusts are trading at wide discounts and several trusts with enhanced dividend policies are not trading at the premium rating they historically have done. This arguably creates an opportunity for long-term investors. With interest rates beginning to come down, those on a wider discount could soon benefit from improved optimism, whilst their elevated and reliable yields will only look more attractive on a relative basis.

Ahead of their interims early next month.

Dividend

The Company is on track to deliver its target dividend of 6.32p per share for the financial year to 31 March 2025, covered by net operational cash received from investments.

Story by Ben McPoland

I’d buy this FTSE dividend share to target a lifelong second income© Provided by The Motley Fool

The past couple of inflation-hit years have shown how a second income can be worth its weight in gold. For me, the simplest way to generate income is through dividend shares. When carefully chosen, they offer a reliable stream of cash that I can spend, save, or reinvest to fuel the compounding process.

Walk the walk

One thing I want from a dividend-paying firm is a commitment to increasing its annual payout over time.

But hang on. Don’t most companies have a “progressive” dividend policy? Well, yes, in theory. But I want evidence that a company can back up its promise with actions.

The easiest way to judge this is by looking at the firm’s track record. How long has it been consistently increasing its dividend?

Take Diageo (LSE: DGE), for example, which owns category-leading brands like Guinness, Johnnie Walker, and Don Julio premium tequila. It’s increased its payout for over 25 years, making it a Dividend Aristocrat.

My ideal scenario is that a stock pays me income for life. I reckon Diageo has a chance of doing so, which is why I’m a shareholder.

In contrast, some shares have a dreadful track record of creating long-term shareholder value, including BT and Vodafone. So I tend to stay away from these.

Supermarket shelves to pub taps

Now, the caveat here is that even the most well-run companies can come unstuck due to black swan events. The global pandemic, for example, forced many businesses to suspend shareholder distributions.

In most cases, this was a wise move, as nobody knew how long the pandemic would last. Some had to take on huge debt to survive and have only just started paying dividends again. Rolls-Royce is one such high-profile example.

Diageo did carry on paying dividends throughout Covid though, demonstrating the resilience of its business. And last year, even after profits took a hit, it hiked the dividend 5%.

Despite these challenges, I’m confident in the long-term income prospects from Diageo. Its top-tier brands have growth potential in huge emerging markets like India, while it’s also building out its alcohol-free drinks portfolio.

For example, Guinness 0.0 has been gaining serious traction. In the year to June, it doubled its net sales in Europe and became the UK’s number one non-alcoholic beer.

As a shareholder, I felt duty-bound recently to do some boots-on-the-ground research to see what all the fuss was about. I was actually very impressed, and can see why Guinness 0.0 has successfully transitioned from supermarket shelves to pub taps.

Unusually high yield

The Diageo share price has fallen 42% in just under three years. This is due to high inflation, which has caused a severe downturn in the global alcohol industry.

One thing this has done is push up the forward dividend yield to 3.7%. This is historically rare for Diageo and was one reason why I added to my holding a couple of months back.

The post I’d buy this FTSE dividend share to target a lifelong second income appeared first on The Motley Fool UK.

Baby steps.

I’ve invested another £900 in SDIP. I usually try to re-invest round sum amounts but there are some dividends to be added to the account this Friday but SDIP goes xd on Thursday. I always feel uncomfortable having cash which isn’t contributing to the Snowball.

Note the dividend is declining, partly because it’s paid U$ dollars but something to monitor.

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Investment trusts could benefit from more optimism

Give yourself an edge with investment trusts. Finding winning stocks is no mean feat.

(Image credit: Daniel Zuchnik/WireImage)

By Max King

“Investment is simple but it’s not easy,” said Warren Buffett, implying that there was only one way to do it well – his way. Excellent though his record is, this is an exaggeration. Different rules work for different managers and being too prescriptive is a mistake.

Moreover, what works isn’t constant over time. Technology has radically altered the tools available to fund managers, who have had to adapt. Information once gleaned over lunch or a drink in the City, or by talking to indiscreet corporate management, is now instantly available on Bloomberg to tens of thousands of people worldwide.

“A desk is a dangerous place from which to view the world,” wrote John le Carré. He was talking about the craft of spying, but his observation applies equally well to investment. So pervasive are information and opinions that it is almost impossible to gain an edge from manipulating or staring at screens. It requires insight: seeing an opportunity either ignored or not identified by others.

What can fund managers do?

Most fund managers boast about how many meetings they have with boards of companies, but there are few insights to be gained in this way. Managers are always well-prepared and know what they can and cannot say. They make the same presentation to lots of analysts and brokers and have thoroughly rehearsed the answers to predictable questions.

The fund manager, following hundreds of firms, can never compete in terms of knowledge against a team working full-time for a company. He or she can, however, apply a broader perspective that is not available to management, bring to bear knowledge learned from other companies and walk away if they don’t like what they see. This rarely requires a meeting, but a busy schedule of meetings impresses colleagues, investors and the fund managers’ bosses.

Visiting companies is better, but not guaranteed to give the fund manager an edge. It is usually interesting, even fun, it’s a nice day out of the office, it reminds fund managers that they are investing in businesses, not pieces of paper, and can provide priceless insight, although not usually about the company visited.

The larger fund-management companies employ a multitude of analysts to assist their fund managers, but this does not necessarily improve outcomes. It can lead to groupthink, a lack of accountability for decisions and an inability to see the wood for the trees. Great investment ideas, especially for contrarian investors, are often the result of inspiration, not perspiration.

Peter Lynch, who, as manager of Fidelity’s Magellan Fund returned a compound 29% per annum for 13 years, advocated the use of personal experience or that of friends and family in the workplace, the shopping centre and elsewhere in daily life to identify investment opportunities missed by the experts. This hardly fits into the “investment process” that fund managers talk about. But, along with checking some numbers, it can result in what Lynch called “ten-baggers”.

“My favourite holding period is forever” is another of Warren Buffett’s quips. But as James Harries manager of the STS Global Income & Growth Trust points out, he didn’t say it was his only holding period. Harries advocates “low turnover, not no turnover”: in the case of STS, about 10% a year.

Craig Baker, the manager of Alliance Witan Trust, likes to show that “while global markets have always been concentrated in the top-ten companies by market value (as they are now), there is little sequential order from decade to decade”. IBM was in the world’s top ten for three decades and Exxon for four, but neither is in the top ten now.

No company in today’s top ten, other than Microsoft, featured 20 years ago. Some from earlier decades – Kodak, and AT&T – have disappeared and many others, such as General Motors, General Electric, Nokia and Cisco, are shadows of their former selves.

Beating the benchmark

Investment trusts provide much greater longevity because managers can maintain their standing by altering their investment policy and slowly shifting their portfolios. Still, strategies such as the value-orientated one favoured by STS can be out of favour for considerable periods of time, while investors in Baillie Gifford’s trusts have found out that great performance is not sustainable indefinitely.

Every fund manager wants to beat their benchmark index. However, most don’t, and none do so consistently. Investment trusts, thanks to structural advantages, are best placed to do so. Research has shown that the best blueprint for outperformance is a portfolio very different from the benchmark index and with low turnover – but that also risks marked under-performance.

Investors seek to outperform not just by picking the best managers, but also the best style or speciality. Over the last five years, Baker points out, investing in growth companies has worked, returning 92% against 41% for “value” (cheaper companies with lower growth). Many argue that it is time for the pendulum to swing back, given the good long-term record of value investing, but they have been wrong for some time.

Likewise, smaller companies have a well-documented record of long-term out-performance, but have now underperformed for eight years. There is speculation about a return to favour for the Chinese market, but its long-term record relative to India is catastrophic. Baker’s advice is “to take profits from outperformers and add to underperformers”, otherwise known as portfolio rebalancing, but that involves selling winners to buy losers – the opposite of what conventional wisdom says investors should do.

Should you trust trusts?

Managing a portfolio of investment trusts is neither simple nor easy, but it’s a lot better than direct investment. Yet many investors waste far too much time worrying about economics and geopolitics. There are times when prophetic warnings are visible (to those who look well outside the mainstream), but they are swamped by the avalanche of dud calls.

Equally tempting are measures of the valuation of markets. Surely the US market is expensive and the UK cheap? Yes, but maybe that is for good reasons, such as the greatly superior earnings growth of US companies. Many investors swear by the “cyclically adjusted price/earnings ratio”, which briefly showed the US market to be cheap at the end of 2008, but otherwise not for 30 years.

When Nathan Rothschild was asked about the secret of his success, he replied: “I never buy at the low and I always sell too soon”. He also advised investors “to buy when there’s blood on the streets” and “to buy on the sound of cannons, sell on the sound of trumpets”. Market sentiment provides a very useful contrary indicator, but strong signals are infrequent. So what are investors to do when the signals aren’t clear?

Michael Mainelli, the retiring Lord Mayor of London (a scientist, not a financier) reminds us that “the opposite of danger is taking risks” and provides the excellent advice: “Let’s be optimistic; pessimism is for better times”. After all, in the last 100 years, Wall Street has risen in three years out of four years.

This article was first published in MoneyWeek’s magazine

Thursday 21 November

3i Infrastructure PLC ex-dividend date
abrdn Asia Focus PLC ex-dividend date
BlackRock Greater Europe Investment Trust PLC ex-dividend date
BlackRock Sustainable American Income Trust PLC ex-dividend date
Empiric Student Property PLC ex-dividend date
Fair Oaks Income Ltd ex-dividend date
Fair Oaks Income Realisation Ltd ex-dividend date
HICL Infrastructure PLC ex-dividend date
JPMorgan UK Small Cap Growth & Income PLC ex-dividend date
NB Distressed Debt Investment Fund Extend Life Ltd ex-dividend date
NB Distressed Debt Investment Fund New Global Ltd ex-dividend date
Petershill Partners PLC ex-dividend date
Regional REIT Ltd ex-dividend date
Scottish Mortgage Investment Trust PLC ex-dividend date
VPC Specialty Lending Investments PLC ex-dividend date

A scenario where u have been re-investing your dividends and intend to spend some of your hard earned in 3 years time.

U want to have a special holiday to mark your retirement and have earmarked 10k to be withdrawn from your SIPP. If u haven’t crystalized any of your funds, under current tax law it will be tax free.

U decide to invest 10k in NESF yielding 11.7% and 10k in a gilt.

NESF

7 November 2024

Interim Dividend Declaration

NextEnergy Solar Fund, a leading specialist investor in solar energy and energy storage, is pleased to announce its second interim dividend of 2.11 pence per Ordinary Share for the quarter ended 30 September 2024, in line with its previously stated target of paying dividends of 8.43p for the financial year ending 31 March 2025.

The interim dividend of 2.11 pence will be paid on 30 December 2024 to Ordinary Shareholders on the register as at the close of business on 15 November 2024. The ex-dividend date is 14 November 2024.

GILT TS 28

If U buy today, u have to pay the holder for interest accrued, which u will be paid on the 7th Dec.

If u hold to maturity u will earn 4.36% tax free if held within a tax free wrapper. If outside a tax free wrapper a low coupon gilt would be the preferred option.

Until u retire u have maintained a blended yield above 7% and have a guaranteed cash sum for that special occasion. Another option would to buy 10k of a money market account but the amount returned would be subject to how low interest rates fall before they start to rise.

But as always not recommendations to buy as it’s always best to DYOR subject to your own circumstances. GL

Savers warned over ‘risky’ pension strategy as retirement pots plummet

Story by Mattie Brignal

Pensions

Savers have been warned about a “risky” pension investment strategy amid a steep rise in complaints.

The number of complaints concerning pension “lifestyling” nearly tripled last year, as the collapse in the value of bonds blew holes in savers’ retirement pots.

Lifestyling is the default investment strategy for defined contribution (DC) pension schemes where the risk profile of a pension pot changes the closer you get to retirement age. 

Growth-focused stocks and equities are sold off in favour of traditionally lower-risk investments such as bonds.

Lifestyling pensions were designed for those who buy an annuity – which ensures a guaranteed income for life – as the vast majority of savers did before pension freedom rules were introduced in 2015. 

However, government bonds – known as gilts – have performed poorly since the Bank of England raised interest rates 14 consecutive times between December 2021 and August 2023.

Most bonds pay a fixed interest rate, so when interest rates rise, they become less valuable.

It means many savers have seen tens of thousands of pounds wiped off the value of their retirement pots. Those approaching their target retirement date saw the value of their assets fall most steeply.

In her Budget last month, Chancellor Rachel Reeves’ dragged private pensions into the inheritance tax net from April 2027. Annuities will also be subject to the 40pc levy. 

But pensions experts said the Chancellor’s move will change savers’ retirement strategies, encouraging them to spend their pension pot earlier, rather than leaving it as the last funds they use. This, in turn, will increase the popularity of annuities.

The pensions death tax raid also spares the public sector where defined benefit retirement deals – which cannot be inherited – are the norm. 

Tom McPhail, of pensions consultancy, The Lang Cat, said: “Lifestyling has made a lot less sense post-pension freedoms because it’s harder to know in advance what you will do with your pension pot in your 60s.

“Inheritance tax on pensions is definitely a further complication in the equation – I think annuities are going to become more popular as a result.”

Rob Burgeman, of RBC Brewin Dolphin, said it was  “unsurprising” that the number of lifestyling complaints had risen steeply.

He added: “One of the consequences of rising interest rates was to decrease the value of bonds that were priced when base rates were at historic lows. 

“When bond and gilt prices were kept high by low base interest rates, these funds ‘locked’ savers into anomalously low annuity rates.

“These lifestyle pension products have turned out to offer lower returns than anticipated. They were designed in a time when most people saving for retirement would buy an annuity, but the reality is somewhat different for many savers today.”

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If your plan is to compound your dividends, you will be aware that the last few years of compounding will equal most of the early year totals.

No guarantees but as cash is king when u retire, u could move some of your hard earned into gilts. Now gilts are risk free if you hold until maturity.

So one option would be to build a gilts ladder e.g. if you intend to retire in 2030, buy gilts that mature after that date.

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Hey there this is somewhat of off topic but I was wondering if blogs use WYSIWYG editors or if you have to manually code with HTML. I’m starting a blog soon but have no coding expertise so I wanted to get guidance from someone with experience. Any help would be enormously appreciated!

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No need for any manual coding, it’s all fairly straightforward. GL