Equity investment trust dividends fell for the first time in a decade during the first six months of the year, but the drop could have been greater were it not for more than £2bn of reserves tucked away before the pandemic.
According to Link Group, investment trust dividends dipped 3.1% to £891.9m in H1, marking the first fall since the second half of 2010. By contrast, the wider UK stock market saw first-half 2021 dividends, excluding one-off specials, rise by 8%, thanks to a favourable comparison to the cuts that started in 2020.
However, since the pandemic began, investment trust payouts were up 2% compared with a 34.6% fall for UK plc. This bettered Link’s estimate that investment trust dividends would have fallen by almost a fifth over the same period.
Link Group analysis shows that investment trusts have been using reserves to fund dividends. It found pre-pandemic, investment trusts had accumulated reserves of £2.13bn which by mid-July 2021 had dropped to £1.77bn. This meant that £22 in every £100 of dividends distributed by investment trusts over the last 12 months has been funded from reserves. More than half of trusts (56%) have dipped into their reserves in this way, Link said.
Smooth out peaks and troughs
Link Group managing director, corporate markets EMEA, Ian Stokes said: “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.
“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.”
Association of Investment Companies (AIC) chief executive Ian Sayers (pictured) said: “As Link’s Investment Trust Dividend Snapshot highlights, investment companies have important income benefits. Investment companies can hold back dividends from investee companies in a revenue reserve and distribute these dividends to shareholders in tough times such as the pandemic.”
Alternative assets make a difference
The AIC also noted there was an 11% rise in payouts across the whole sector during the period when alternative assets were included.
Sayers added 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.
“This demonstrates the importance of having a balanced income portfolio,” he said.
