Investment Trust Dividends

Dividend machines

The most consistent income payer in the sector is City of London (CTY), holds the impressive distinction of delivering increased dividends for the longest consecutive period of any trust in the wider sector. Its 58-year track record of annual dividend increases underscores one of the key advantages of investment trusts – the ability to use income reserves to ensure smoother dividend payouts, even during tough market periods.

In our view, CTY’s record is remarkable, even though underlying earnings haven’t risen every year. CTY has had made effective use of the investment trust structure, which allows it to retain up to 15% of each year’s income in reserve. This reserve can then be drawn upon in leaner years to smooth dividends if revenues subsequently fall. For instance, when companies worldwide were forced to cut or suspend dividends during the pandemic, CTY was able to maintain its record of consecutive increases, despite a significant fall in revenue, as shown below.

DPS & EPS

Aside from consecutive dividend increases, we think  CT Private Equity (CTPE) stands out as a differentiated player in the income/dividend space. The private equity sector is experiencing wide discounts, prompting some boards to announce formulaic capital allocation policies that seek to allocate a proportion of future realisation proceeds towards capital returns through buybacks. However, the board of CTPE generally sees the dividend as a more equitable way of returning capital to shareholders, and whilst it has bought back shares on occasion, the preference is to return capital through a strict, formulaic approach to paying dividends. Consequently, this focus, alongside the managers’ investment process, has resulted in a historic dividend yield of 6.5%, attractive versus peers in the sector but also the wider trust sector.

Moreover, by favouring dividends as the primary means of returning capital we think CTPE provides a more predictable and transparent flow of income, particularly valuable for income-focussed investors who prioritise regular payouts over potentially unpredictable gains from buybacks. Furthermore, whilst buybacks can help manage discounts in the short term, they do not necessarily build long-term value in the same way that consistent dividend payments can. A risk worth bearing in mind is the illiquidity of the underlying assets, which, depending on the timing of the company’s other cash flows, may see CTPE use debt to fund the dividend, in turn increasing the gearing.

Kepler

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