In its latest monthly research note, Winterflood points to the “fortuitously timed” change in tax rules allowing onshore investment trusts to pay dividends out of capital profits. It says that increasing dividend has become an alluring option for funds which are struggling to attract buying demand.
As an example of a fund which has boosted dividends, the researchers highlighted Foreign & Colonial Investment Trust which announced a 20% increase in its dividend last month and a switch to quarterly dividends.
The report also found that asset classes which offer attractive levels of yield, preferably uncorrelated to equity markets, have seen substantial growth in size. The most obvious proponent of this, it says, is the infrastructure sector, which currently houses six funds. All the funds continue to trade at a premium, despite aggregate issuance of nearly £500m so far this year, and the subsector has grown to be worth £3.8bn in assets.
The report states: “We expect more retail-orientated equity funds to announce increases to their dividends going forward. Assuming dividends are sustainable, this would appear to make sense, although we are wary of managers changing their investment approach in order to boost revenue. Similarly demand for asset classes such as infrastructure shows no signs of abating yet.
“It is difficult to see the point in time when interest rates will have returned to ‘normal’ levels and equity markets are more inviting. One can assume that this will eventually happen and, when it does, the ratings on higher yielding funds will undoubtedly not be as strong.
“However, this seems some way off and, furthermore, we believe that funds with proven dividend track records will always see strong demand. The need for income is not disappearing anytime soon.”
Last month, Oriel Securities compiled a list of what it found to be the highest-yeilding investment trusts, with a historic yield of 4% or higher.
