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Investment trust dividends fall for the first time in a decade

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Investment trust dividends fall for the first time in a decade but their reserves protect investors from the worst payout cuts of the Covid crisis

  • During the pandemic investment trusts built up reserves used to pay out dividends 
  • Payouts fell 3.1 per cent between January and June 2021 
  • The dip in dividend payments has been cushioned by revenue reserves










Investment trust dividends dipped in the first half of 2021, the first fall since 2010,, but the wider payout picture in the UK and across the world is now recovering. 

Investment trust dividends payouts fell 3.1 per cent to £891.9million between January and June 2021, £29.million less than in the first half of 2020. It marks the first fall in investment trust payouts since the second half of 2010, when the effect of the global financial crisis filtered through to the sector.

The dip in trusts’  dividend payouts however was more modest than the wider cuts in dividends during the pandemic. Between January 2020 and June 2020, UK dividends plunged 36.4 per cent on an underlying basis according to Link Group, while global dividends dipped 5.9 per cent. 

Investment trusts have been largely sheltered from the worst of the pandemic because of their reserves

Investment trusts have been largely sheltered from the worst of the pandemic because of their reserves

Trust dividends always lag behind the wider market because they are paid from dividends distributed by their portfolio companies. 

During the Covid crisis investment trusts were largely able to maintain or even increase payouts to investors when the vast majority of listed companies were forced to cut or axe them entirely.

These listed funds became suddenly more popular in 2020 not just because they can provide exposure to alternative investments and unlisted growth stocks, but also due to this ability to maintain their yields.

This is because, unlike open-ended companies, investment trusts have the capacity to retain 15 per cent of the dividends they receive each year from the companies in their portfolio. It means they can build up reserves which they can draw on in leaner years.

Analysis by Link Group shows that pre-pandemic, trusts had accumulated reserves of £2.13billion from past dividends. By mid-July 2021 the collective revenue reserve had fallen by £360million to £1.77billion. 

This means £22 in every £100 of dividends distributed by the trusts over the last 12 months has been funded by reserves.

‘Investment trust dividends cannot defy gravity, but they do come with a very plump cushion. Not only do they keep cash in reserve, but they can also bank some of the big capital gains they have made over the last year and hand these out to shareholders too,’ said Ian Stokes, managing director of Corporate Markets EMEA at Link Group. 

‘It is one of the most reassuring features of investment trusts that they can smooth out the peaks and troughs in dividend income caused by the economic cycle or big one-off shocks. 

‘The amazing stability of investment trust dividends through the pandemic is a testament to this flexibility. For investors, this regular, predictable income is very welcome indeed.’  

There are signs that the wider UK stock market has started to recover though, with dividends rising 8 per cent since the wipeout seen in 2020.

Link Group expects the payouts from trusts to decline further over the next six months because the recovery in the income paid to trusts will still leave a shortfall compared to pre-pandemic levels. Trusts are expected to pay £1.79billion across 2021, 3.2 per cent lower than the year before.

Between January and June, three trusts in 10 made a dividend cut with an average reduction of 23 per cent. The biggest impact came from the UK Equity Income sector – payouts fell 9 per cent year-on-year – but this is because it is the largest income-paying sector.

‘Although equity investment company dividends have fallen slightly between the first halves of 2020 and 2021, when investment companies investing in alternative assets are included, dividends across the whole sector rose by 11% during the period. This demonstrates the importance of having a balanced income portfolio,’ said Ian Sayers, Chief Executive of the Association of Investment Companies (AIC).

‘For the full year 2020, more than four-fifths (85%) of equity income-paying investment companies increased or maintained their dividends to shareholders despite the impact of the pandemic. In contrast, less than a quarter (23%) of equity income-paying open-ended funds increased their dividends in 2020 and none held dividends at the same level as 2019.’

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