The 20 ‘dividend hero’ investment trusts

THE Association of Investment Companies has recently updated its list of dividend heroes, which are investment trusts that have increased their annual dividends for 20 years in a row. These should appeal not just to income seekers, but investors in general, as dividends are an important component of the total return from investing in stocks and shares.

There are now 20 of these trusts operating in a variety of different sectors, with some of the latest additions specialising in UK small cap stocks, an area not typically associated with dividends. Examples include the BlackRock Smaller Companies Trust and Henderson Smaller Companies, with both yielding around 3% and available at a discount to their net asset value (NAV) price of about 13%. Please note this is not guaranteed.

BlackRock focuses on businesses that generate a high return on capital, which typically results in significant levels of cash flow generation, with the dividends being a by-product of the growth. With Henderson the dividends are an integral part of their approach, as they specifically look for profitable, growing, cash generative, dividend paying companies.

The UK Equity Income sector is the more obvious place to look for dividend heroes and there are three such trusts operating in this part of the market that have increased their annual dividends for more than 50 years in a row. They are: City of London, Murray Income and JPMorgan Claverhouse, with yields of 5.5%, 4.3% and 5.1% respectively.

City is the largest and best known of them, with long-standing manager Job Curtis adopting a conservative approach that prioritises sustainable income and long-term capital growth. The others offer a similar UK large cap exposure, with all three paying quarterly dividends.

If you want to diversify your portfolio and sources of income internationally there are also several global trusts on the list including Bankers and Brunner. These typically have lower yields than their UK counterparts and are currently paying 2.1% and 1.9% respectively, although both are available at discounts to their NAV price of around 13%.

Investment trusts have a structural advantage when it comes to dividends, as they don’t have to pay out all the income they receive from their portfolios each year. Instead they can set aside up to 15% in a revenue reserve and then use it to maintain or increase their distributions when the underlying companies may be cutting theirs.

This valuable feature has enabled many investment trusts to pay consistently rising dividends through both good and bad years for decades, including during the pandemic. The income is not guaranteed, but those trusts that have built up significant revenue reserves are in the best possible position to weather whatever setbacks may come along.

Here is the full list of dividend heroes.

Source: Association of Investment Companies, September 2023

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. 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. 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.