Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

One advantage of investment trusts over ordinary funds is that they can hold back some of the dividend income they receive from their holdings and use that money to support the dividends they pay shareholders in future years.

This income “buffer” has helped some trusts to increase dividends annually for many decades. Trusts that have raised their dividend every year for 20 years or more are sometimes called “dividend heroes”.

That said, the appeal of an investment trust to income seekers is likely to be lessened if, in spite of a lengthy period of consecutive annual increases in the dividend, the actual yield is still low. So we scrutinised the list of “dividend heroes” to identify those that can currently boast a yield of at least 5% in addition to a 20-year or more record of annual rises in the dividend.

It’s important to remember that dividend payments are not guaranteed and that, even if the dividend is maintained or increased, a rise in the trust’s share price will cause the yield to fall. It’s also worth noting that past performance is not a reliable indicator of future performance, so information about these past successes should be viewed in that context.

We found that while 20 trusts had been given “dividend hero” status by their trade body by virtue of a 20-year history of annual dividend increases, only seven of this elite group also yielded more than 5%.

Some have much lower yields, which will limit their appeal to income investors.

The seven that can boast a 5%-plus yield and at least 20 years of dividend increases are City of London (which has the longest record of consecutive rises at 57 years and yields 5.1%), JPMorgan Claverhouse (51 years, 5.2% yield), Merchants (41 years, 5.2%), Value & Indexed Property Income (36 years, 7.1%), Schroder Income Growth (28 years, 5.2%), Abrdn Equity Income (23 years, 8.4%) and Athelney (21 years, 5.4%). The figures are from the Association of Investment Companies as at 12 March 2024.

Another measure that can help income investors choose funds is the rate of dividend growth. Among the trusts named above, the best rate of dividend growth over the past five years has been achieved by JPMorgan Claverhouse, whose payout has risen by an average of 4.6% a year. Next is Abrdn Equity Income at 3.5% a year, followed by Schroder Income Growth at 3.2%, City of London at 2.6%, Value & Indexed Property Income at 2.5% and Merchants at 2.2%. Athelney managed annual dividend growth of just 1.5% over the past five years.

Some other “dividend hero” trusts can boast much stronger dividend growth but have lower yields at present. They include Alliance Trust, which has raised its dividend by an average of 13.2% a year over the past five years but currently yields 2.1%, The Global Smaller Companies Trust (9.8% dividend growth, 1.5% yield), BlackRock Smaller Companies (9% dividend growth, 3% yield) and the F&C and Scottish Mortgage trusts, which can both boast 6% dividend growth over the past five years but yield 1.5% and 0.5% respectively. 

More on investment trusts

Source: Association of Investment Companies, 12 March 2024

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Past performance is not a reliable indicator of future returns. The shares in these investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. Investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. Overseas investments will be affected by movements in currency exchange rates. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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