The 'dividend superheroes' that beat inflation every year

The ‘dividend heroes’ are investment trusts that have an exemplary record of raising their dividends every year – specifically, as defined by the trusts’ trade body, they have increased their full-year dividends annually for at least the past 20 years.

But if you are a retired saver who relies on investment trust dividends to fund your living expenses, you don’t just want divis that rise: you want your dividends to rise at a pace that keeps up with inflation so that, over the longer term, your quality of life is maintained. 

Which trusts, then, have managed not just to raise their dividends every year but also to deliver inflation-beating divi increases annually? And which, even if they have had the occasional year of below-inflation dividend increases, have paid a dividend that has kept pace with rises in the cost of living over the longer term, such as five or 10 years?  

Fidelity asked the trusts’ trade body, the Association of Investment Companies (AIC), to identify such trusts – what we might call the ‘dividend superheroes’ whose divis have risen in line with inflation and so maintained the standard of living of shareholders who use them to fund retirement. 

In recognition that income, while important, is not everything in investment and that capital gains matter too, we also asked the AIC to calculate the total returns of the dividend heroes over the past five and 10 years.

To the best of Fidelity and the AIC’s knowledge, no such research has been carried out previously.

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Key findings

We present the AIC’s research in full below. But a couple of key messages stand out:

• Broadly speaking, dividends paid by the dividend hero trusts have kept pace with inflation over the past decade. Of the 20 hero trusts, 16 have raised their dividend by enough to beat the rise in the cost of living over 10 years.
• But over the past five years, when inflation has been higher, more trusts have struggled to pay inflation-beating dividend increases. For example, the most famous of the dividend heroes, City of London, which can boast a 59-year record of consecutive dividend rises, has not made a dividend increase that kept pace with inflation since 2020.
• Some of the best records of inflation-beating dividends belong to trusts that do not yield enough to be of interest to income-seeking investors. The Global Smaller Companies Trust, for example, increased its dividend by an unbeaten cumulative total of 211% over the past 10 years, but the trust yields just 1.7%. The trusts with the best inflation-beating dividend records all belong to sectors other than equity income or global equity income
• Just one dividend hero trust increased its dividend by an inflation-beating amount in every one of the past 10 years, although that trust, Alliance Witan (or its predecessor Alliance Trust), yields only 2.2%
• Even trusts whose dividends have beaten inflation comfortably over the past 10 years may not have delivered a high total return (share price rise plus dividends). Value & Indexed Property Income, for example, paid an inflation-beating dividend in seven of the past 10 years and the cumulative rise comfortably beat inflation over 10 years, but its total return over the decade was just 25.3%

The results in detail

We now present the AIC’s analysis in detail. We should note a couple of points about the methodology. The research uses the total dividend payments in each trust’s financial year, not calendar years. Those annual divi payments are compared with inflation over the same, ie. non-calendar, years. So if trust X has a financial year that runs from March to March, its divi’s are compared with inflation from March to March. Hence different trusts’ dividends are compared with different inflation figures. Over five and 10 years, however, such differences are unlikely to have significant effects. Figures are as of the close of business on 2 February. The inflation measure used is the Consumer Prices Index (CPI).

Year by year: which trusts’ divis beat inflation every year over the past decade, even during the cost of living crisis?

The following ‘heat map’ shows the dividend increases of each dividend hero trust over the past 10 years and whether the increase beat inflation (shown in green) or not (red).

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The shares in the investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. 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.