The dividend heroes that have beaten inflation
Investment trust dividend heroes are classified as funds that have increased their dividends every year for at least 20 years in a row. While this list, published by the Association of Investment Companies (AIC), will help you spot products with a dividend growth track record, it doesn’t tell you the level of growth and what it would be in ‘real terms’ when adjusting for inflation.
If growth in dividends does not keep pace with the cost of living then the ‘real’ value of these dividends will be eroded.
Fortunately we have the prized information. Shares has crunched the past 20 years’ data to see which dividend hero investment trusts have managed to consistently beat inflation with their level of dividend growth.
Three investment trusts have passed the test over the past two decades: Bankers Investment Trust (BNKR), Caledonia Investments (CLDN) and JPMorgan Claverhouse (JCH). They’ve achieved 6.5%, 5.4% and 7.5% average dividend growth, respectively.
Credit should also go to Witan Investment Trust (WTAN) which has grown dividends in excess of inflation over the past 10 years, averaging an 8.8% hike annually over that period.
We’ve used the CPI (consumer price index) measure of inflation, which represents a basket of goods and services that impact all of our day-to-day lives.
QUALIFYING AS A “HERO”
The concept of dividend heroes has really taken off in recent years with qualifying investment trusts eager to hold on to their position within the AIC’s index.
It can be seen a valuable marketing tool, hence investment trusts will do their upmost to stay in the index. The risk is that investors may only get a small increase in the dividend. After all, a trust would only need 0.01% annual dividend growth to stay classified as a dividend hero once they’ve qualified for the 20-year growth stretch.
For example, Merchants Trust (MRCH) has increased its dividend by less than 1% in six out of the past 10 years, according to data from the AIC and Morningstar. Scottish American (SCAM) has a reputation for volatile annual dividend growth – its highest was 13.3% and its lowest was 0.4% over the past two decades.
20 TRUSTS ON THE LIST
Overall there are 20 investment trusts qualifying for dividend hero status. In 2018 Bankers Investment Trust, City of London Investment Trust (CTY) and Alliance Trust (ATST) achieved their 52nd year in a row of increasing dividend payments to shareholders.
This means these three trusts started paying their shareholders higher dividends in the same year that England won the World Cup, and they’ve not stopped since.
Caledonia Investments made it a 51-year run in 2018, while there are half a dozen others closing in on their big 50.
RECENT DIVIDEND GROWTH
Last year BMO Global Smaller Companies (BGSC) hiked its annual payout by nearly 18%, from 12.25p to 14.4p per share, the biggest increase in 2018 of all the dividend heroes.
But not all increases were so impressive. Those from British & American Investment Trust (BAF) and Murray Income Trust (MUT) were particularly dismal, failing to beat 2018’s benign 2% inflation rate at 1.16% and 1.53%, respectively.
In fact, Murray Income has now failed to beat inflation with its dividend increase in each of the past three years, unique on the dividend heroes list.
You have to go back to 2013 to find its last time the trust raised its income payout by more than 3%. Yes, Murray has been increasing payouts for 45 years, yet evidently, not always meaningfully so.
There are caveats, such as income yield. Murray Income yields 4% based on the latest share price and historical payout. Even higher is a 5.1% yield on offer from the Simon Gergel-run Merchants Trust. Its dividend grew by 2.5% last year.
Gaining dividend hero status undoubtedly buys hard-earned credibility with income-seeking investors – kudos that investment trust managers will not give up lightly. But investors need to be aware that retaining that status could influence dividend policy in the future in ways that you may not want.
This could mean that investing in dividend hero trusts are not necessarily the best way forward for every income-seeking investor. Questions need to be asked regarding what’s right for every individual.
For some, a relatively high yield and capped growth may be the way forward, such as those already in retirement and living off their savings. But others, especially those with a longer-term horizon, higher dividend growth may suit future needs better.
THREE INFLATION-BUSTING DIVIDEND HEROES TO BUY
JPMorgan Claverhouse Investment Trust (JCH) 702p
Already a popular investment trust selection for investors who want attractive income returns to bolster capital growth, JPMorgan Claverhouse is a particularly attractive pick for investors happiest putting their money in the UK companies space. It focuses on a mixture of growth and income stocks. Dividends are paid quarterly which will be attractive for retirees living on investment income.
Portfolio holdings include: Royal Dutch Shell, Unilever, JPMorgan Smaller Companies
3-year total return: 44.3%
Discount to NAV: 3.2%
Witan Investment Trust (WTAN) £10.60
A global equities remit that aims to produce less volatile returns than many of its peers, Witan is unusual in its management strategy.
Rather than lean on on in-house team, the trust draws on the expertise and experience of up to 10 third party managers that influence investment decisions. They include some well-known names, such as Nick Train of Lindsell Train and Derek Stuart of Artemis.
Portfolio holdings include: Syncona, Diageo, Lloyds
3-year total return: 54.0%
Discount to NAV: 1.6%
Bankers Investment Trust (BNKR) 895p
Bankers is attractive to investors thanks to its long dididend growth track record and making a real virtue of diversification and achieving decent capital gains.
It had close to 200 stocks in its portfolio at the end of 2018 from all over the world, and its top 10 investments were worth just 16% of the combined value. Add in the dividend track record that extends more than half a century and you can see why it is a popular choice with investors.
Portfolio holdings include: Microsoft, Berkshire Hathaway, BP
3-year total return: 56.6%
Discount to NAV: 1.6%