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Providing explicit commentary in this area would be a step in the right direction
Thursday 01 Apr 2021 Author: Martin Gamble

Given the extraordinary events over the last year which resulted in UK dividends falling an unprecedented 44.1%, research group Stifel argues more transparency is needed on reported dividend cover at investment trusts.

One of the advantages that investment trusts have over open-ended funds is their ability to ‘dip into’ revenue reserves in rainy day years to top-up any shortfalls in income from their investee companies.

So despite the carnage wrought on company dividends by the pandemic, data from Link Asset Services shows investment trust dividends rose by 4.2% overall with the biggest percentage cuts coming from relatively smaller trusts.

While that is good news for investors in investment trusts, it only tells part of the story because dividend cover is just as important for sustaining future dividends.

Continuing to pay dividends which are uncovered by underlying income from their holdings is not sustainable for trusts over the long term. But finding the information in the accounts to enable investors to calculate dividend cover is often not easy.

For example, Stifel highlights Alliance Trust (ATST) where the board stated it had increased the dividend for 54 consecutive years, ‘partly assisted by using reserves’.

It continued: ‘Even in the extremely unlikely event that the company receives no dividends at all from its portfolio over the next two years, it could continue to pay an increasing dividend from its revenue reserves alone.’

While this is comforting, it fails to specify the actual level of dividend cover.


Stifel argues that boards should provide clearer information on dividend cover as well as guidance on expected dividend pay-outs from stocks they hold.

For example, it would be useful to differentiate between the impact from companies which have suspended their dividends from those that have cut or rebased.

It would be reasonable to expect those companies which have suspended their dividends to quickly restore them post crisis, while those companies that have permanently cut or rebased the dividend are likely to take longer to reach pre-crisis levels.

Providing investors with a clearer picture of how a trust’s revenues from investee companies might change over the coming year will give them an insight into how likely the trust is to dip into future revenue reserves.

This is important because as Stifel notes, dipping into revenue reserves to maintain dividend payments reduces an investment trust’s net asset value, which affects the discount or premium.

One suggestion is to present accounts with capital and income shown separately so that investors can calculate the cover for themselves or alternatively that investment trust boards provide explicit comment on the level of dividend cover.

Investment trusts have provided an oasis of income during the dividend drought of 2020, so it would be a shame if trusts undermined this through a lack of communication.

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