Investors often wish they had a time machine. Seekers of reliable dividend income in Britain would have been quids in if they had scooped up shares in three British investment trusts in the late 1960s. The City of London Investment Trust, the Bankers Investment Trust and the Alliance Trust are the only three in the UK to have increased their dividend payouts every year for more than half a century. But where should investors be looking for this sort of performance now?
An encouraging backdrop for income
Although we’ve been mired in an era of low growth and low interest rates for years, the overall outlook for income investors seems encouraging for now. The yield on the FTSE All-Share Index is around 4.8% – about the highest it has been since the financial crisis. Job Curtis, manager of the City of London Investment Trust, is optimistic about the level of income being generated from the UK equity market.
“We are seeing mid single-digit figure growth in dividends… so overall, the equity market is not a bad place to look.” The main drivers of this growth recently have been British American Tobacco, as well as the banking and mining sectors. And with 70% of UK-listed company sales coming from overseas, this yield should be able to weather domestic turmoil.
But choose your stocks carefully. Companies making large payouts to the detriment of capital growth may find it becomes unsustainable, as Ben Lofthouse, manager of the Henderson International Income Trust, told The Times last week.
“If you get caught in a dividend trap, you might find the income you hoped for has no prospect of sustainable growth. This eliminates one of the main advantages of investing in equities. Dividend growth not only protects investors from inflation, it drives share prices higher over the long term, meaning investors can benefit from capital gains.”
In a recent example of a promised dividend which failed to deliver, last month telecoms giant Vodafone cut its dividend by 40%, having told investors in November that it would maintain it for the financial year. Unfortunately, the high cost of investing in 5G technology thwarted this optimism. Before the dividend cut it had been yielding 9.3%.
Investors are keeping an eye on BT Group, which will also be thinking about the cost of 5G technology. The dividends of utilities SSE, Centrica and National Grid also appear shaky. Given the uncertainty surrounding dividend payouts at several individual companies, it’s no wonder investment trusts with long records of increasing dividends are so popular.
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