Association of Investment Companies list of dividend heroes – good choices for income investors?

Back in March this year The Association of Investment Companies (AIC) updated its list of ‘dividend hero’ investment trusts. These 21 dividend heroes are the investment companies which have consistently increased their dividends for 20 or more years.

I think they’re right to point out that: “In these tough market conditions and with interest rates falling, the reliability of income streams is even more important.

Four dividend heroes have raised their dividends consistently for over 50 years. City of London Investment Trust, Bankers Investment Trust and Alliance Trust lead the way with 53 years of consecutive rises. Caledonia Investments follows close behind with 52 years of increases.

A further seven trusts have increased their dividends for 40 or more years in a row and another five have done so for more than 30 consecutive years.

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “With the market turmoil of the past few weeks, it’s comforting to know that the 21 dividend heroes have been raising their dividends through thick and thin for decades. City of London, Bankers and Alliance have increased their dividends for an impressive 53 straight years. To put this in perspective, this means they have been increasing their dividends every year since the Beatles released Sgt. Pepper’s Lonely Hearts Club Band.

“Whilst there’s no guarantee, the fact investment companies can save up to 15% of their income each year has helped them to carry on raising dividends through such intense market downturns as the 1987 crash, the dot com bubble bursting and the financial crisis. With the difficulties facing markets at the moment, the power of investment companies to deliver rising dividends is reassuring for investors.”

I’m going to look a little more at the five companies with the longest number of consecutive years of dividend increases:

  • City of London
  • Bankers
  • Alliance Trust
  • Caledonia
  • BMO Global Smaller Companies

City of London

Perhaps reflective of the quality of this investment trust is the fact that it trades at a small premium to its net asset value (NAV). The trust is UK focused with 88% of the holdings in the UK, followed by 6% in the US. The companies held include Royal Dutch Shell (which has cut its dividend significantly and for the first time since WWII), HSBC, British American Tobacco, Diageo and Unilever.

I think the holdings of the FMCG companies is fortunate for the trust and its investors as these have fared rather better in the volatile market we’ve recently experienced.

The shares yield 5.5% so are appealing for income investors and worth keeping an eye on. With 11% gearing the risk from the shares’ leverage isn’t too large. The trust has 91 holdings giving it a good level of income diversification. The ongoing charge is also very competitive at 0.39% which is also good news for long term, income-focused investors.

Bankers

This investment trust gives a UK private investor far greater exposure to some of the biggest companies from across the pond. Its top holdings include Microsoft, Visa, American Tower, Amazon.com and Alphabet. Estée Lauder is the second-largest holding, a company Terry Smith also holds. This trust trades at a small premium to the NAV.

Perhaps unsurprisingly given its slant towards US tech, the trust has a lower dividend yield which is near to 2.2%. The trust has no gearing which makes the share less risky. A larger number of holdings, 176 to be precise, also make the trust less risky. Charges are 0.52%.

Alliance Trust

Like Bankers, this investment trusts also gives investors access to big US technology companies. Again that means for income investors the yield is lower at 2%, but the potential for share price growth could be higher. The history dividend increases also shouldn’t be overlooked. The trust’s top five holdings are: Alphabet, Microsoft, Amazon, Alibaba and Mastercard. The discount to NAV is around 6%. Net gearing is 7.7%. The charges are 0.62%.

The approach of alliance Trust is different to most of the others, as they employ teams from other investment companies, like Jupiter, to create the portfolios. The portfolios tend to be concentrated but span different styles of investing with few restrictions on what the different managers can do.

Caledonia

This investment trust has a much greater mix of assets, which investors may want to see in an uncertain market. The trust invests in listed equities, private companies and funds. It has 8% of its assets as cash. The biggest holding by some distance is a control systems company called Deep Sea Electronics. This is followed by Cobehold, Stonehage Fleming, Seven Investment Management and Cooke Optics. Microsoft is the ninth-largest holding.

This trust trades at a 22% discount to NAV, offering plenty of opportunity for upside. The shares yield 2.3%. The charges for the trust are higher than the other funds at 0.95%.

BMO Global Smaller Companies

This trust invests in smaller companies globally. It invests in a lot of other funds to earn a return, these include Aberdeen Standard SICAV I Japanese Smaller Companies and Eastspring Investments Japan Smaller Companies. These two funds account for 8.8% of net assets. The discount on the shares is 12%.

Given that the focus is on smaller companies the shares don’t have a high dividend yield, providing 1.5%, but again the consecutive years of dividend growth are an encouraging sign. The ongoing charge is 0.79%.

It’s encouraging that these trusts have done well historically and often by pursuing different strategies. Those with a focus on US tech should be beneficiaries of the current covid-19 environment with shares prices in Microsoft and Amazon to take just two examples rocketing.

Overall, these trusts could be worth investigating further. Past performance isn’t necessarily a reliable indicator of the future but where managers have run a trust for a long time it may be an indicator of their commitment to growing the dividend year-on-year. That’s something I think many income investors will be keen to see, especially with many high-yielding shares cutting their dividends.

I don’t own any of the investment trusts mentioned.

if you like this article please check out some investment trusts I’ve recommended.

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