As companies rushed to cut or suspend dividends in the wake of the pandemic this had a knock-on effect on the investment trusts which held their shares.

Thanks to the ability to use revenue reserves to smooth out any volatility in dividend payments, there was a lag effect in place.

Between January and June 2021, payouts from investment trusts fell 3.1% to £891.9m, even though dividends from UK stocks were actually up 8% in the period which saw companies become more confident about paying cash to shareholders a year after the pandemic gripped the world.

Revenue reserves

Investment trusts can hold back up to 15% of the income they receive from investee companies in any given year to build up revenue reserves. These can be drawn on in more difficult times to make up for any shortfalls in income from the firms in their portfolio.

The decline in investment trust dividends was the first since the second half of 2010, when dividend cuts that followed the global financial crisis filtered through.

NOT QUITE AS IT SEEMS

Research by broker Stifel shows the picture is more nuanced with this 3.1% average decline accounted for by a handful of cuts.

Stifel says: ‘Averages can conceal a lot of things and the vast majority of trusts have maintained or increased dividends.’

It adds: ‘If we look at individual trust dividend payments across the whole universe, it appears that the vast majority have at least maintained and, in many cases, increased their dividends.

‘This is even the case for the UK equity income sector, where we would expect the worst declines, given UK plc dividends fell circa 40% last year, following suspensions and reductions.’

The three UK equity income trusts which did trim their dividends – Edinburgh (EDIN), Temple Bar (TMPL) and Troy Income & Growth (TIGT) – all did so alongside a change of management and signalled their intention to grow their respective payouts from a
new base.

Edinburgh was previously managed by Neil Woodford and subsequently his protégé Mark Barnett before asset manager Invesco was sacked by the trust’s board in December 2019.

As well as restructuring the portfolio, the new manager Majedie Asset Management chief investment officer James de Uphaugh took the opportunity in the wake of Covid-19 to rebase the quarterly dividend at 6p from 6.4p per share with a plan to grow from there.

Temple Bar had been struggling for a while, with fund manager Alastair Mundy leaving in 2020, and the new managers from RWC Asset Management unveiled plans for a 25% dividend cut.

Troy Income & Growth cut its quarterly dividend by nearly 30% as it reacted to the pandemic-related drop in income. While the mandate for the trust remains with Troy Asset Management, long-standing manager Francis Brooke announced plans to retire at the end of 2021.

The UK equity income sector saw 10 trusts increase their payouts in the first half of 2021, while eight left them unchanged.

It is therefore no surprise to see Stifel laud the trust space for its record on dividends through the pandemic. ‘Overall, we think trusts have done a good job of delivering dividends, especially when compared to open-ended funds,’ the broker says.

‘The use of revenue reserves has been very helpful, although this has meant that dividends uncovered by revenue earnings per share, have effectively been maintained through the payment of capital or net asset value to shareholders.’

In other words, using revenue reserves to maintain dividend payments has the effect of reducing an investment trust’s NAV. In turn, this can impact the discount or premium at which the shares trade.

HIGHEST YIELDING TRUSTS

The table shows a selection of the highest yielding trusts with dividends covered at least once by income from their holdings, based on payments from the most recent set of full-year numbers and the share price at the time of writing.

The list has a smattering of investors in infrastructure, particularly with a tilt towards renewables, where the income isn’t coming from the equity markets, as well as vehicles which diversify their exposure by buying assets like bonds alongside stocks and shares.

A notable name in this grouping is Shires Income (SHRS) which despite being focused exclusively on equities, managed to navigate the dividend cuts resulting from the pandemic thanks to its focus on quality mid and large-cap companies, with dividends in its portfolio down 13%, just one third of the hit taken by the FTSE 350.

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