Global dividends are surging. In the third quarter of 2024, they registered a record rise, with the Janus Henderson Global Dividend index finding nine companies in 10 increased their dividends or held them flat. In the UK, however, dividends bucked the trend in the same period, declining year on year after steep cuts in the mining sector.
Such a variable picture means many income-seeking investors may turn to professional fund managers to manage the risks. In this case it is hard to ignore the Association of Investment Companies’ dividend heroes. These are the 20 investment trusts listed on the London Stock Exchange that have consistently increased their dividends for 20 or more years in a row. They have managed to deliver this in both good and bad years for stock markets, with City of London Investment Trust, Bankers Investment Trust, Alliance Witan and Caledonia Investments having the lengthiest records.
Unlike other types of investment fund, investment trusts do not have to pay out all the income they receive from their portfolios each year. They can save up to 15 per cent and tuck it away in a revenue reserve. When dividend payouts fall, they can use the reserve.
The ability to “smooth dividends” in this way has enabled a number of them to deliver “impressive” records of consecutive annual dividend increases, says Emma Bird, head of investment trusts research at analysts Winterflood.
But the dividend heroes are not the only good sources of income. Thomas McMahon, head of investment companies research at Kepler, says: “For income, the investment trust sector has endless possibilities and is a great place to be looking.”
The income from investment trusts is the dividend yield, the annual dividends expressed as a percentage of the current share price. In October, the AIC found a total of 18 investment trusts yielded 5 per cent or more and a further eight trusts yielded between 4.5 per cent and 5 per cent. Of these 26 investment trusts, the highest yielding was Henderson Far East Income, which invests in Asia-Pacific equities — today, it yields 10.7 per cent.
A high yield is not always a good opportunity, however. Experts warn that investors should look out for value traps, where yields are high because the share price is cheap and likely to fall further.
The AIC groups investment trusts into sectors, among which several focus on equity income. The UK Equity Income sector has the largest number of options and an average dividend yield of 4.19 per cent, but other sectors include Global Equity Income (3.85 per cent) and Asia-Pacific Equity Income (5.85 per cent). There are also a few income options in the North American sector, while the Renewable Energy Infrastructure sector has an average dividend yield of 8.9 per cent.
Experts stress the importance of diversification for income. “You don’t want all your eggs in one basket,” says Peter Hewitt, manager of the CT Global Managed Portfolio Trust, which aims to provide investors with an attractive level of income by investing in a diversified portfolio.
The share prices of most good income options are trading at wide discounts to their underlying net asset values. This is a trend prevalent among most investment trusts, but arguably presents an opportunity for income-seekers. Take Edinburgh Investment Trust, which has a yield of 3.68 per cent. The average discount for the UK equity income sector is -5.87 per cent but Edinburgh is on -10.6 per cent.
18Number of investment trusts that yielded 5 per cent or more, according to the Association of Investment Companies
James Mowat, head of investment companies at Liontrust, the firm that manages Edinburgh, says: “We recently held a retail event for shareholders. A common theme was the dividend flow. They recognised that an investment trust like Edinburgh can provide an income. But they are relaxed about the discount because they are not planning to sell. Their concern was the predictability and reliability of the dividends.”
Despite third-quarter wobbles, Bird points out that the UK has a strong dividend culture, and underlying companies continue to trade at a valuation discount to other markets. Andrew Jones, portfolio manager on the Janus Henderson Global Equity Income Team, says: “It was encouraging to see that the broader UK market remained steady in Q3, with a majority of companies maintaining or modestly increasing their payouts.”
Among UK equity income investment trusts that could do well in terms of closing the discount from here, Hewitt singles out Lowland, which has a focus on financials and industrials. It has a yield of 5.04 per cent and is trading on a 12 per cent discount. “It could come through very strongly,” he says. But Hewitt also cautions that UK dividend increases have slowed.
Research from Octopus Investments found UK smaller companies continue to deliver attractive levels of dividend growth. Over the 10 years to 2025, overall cash payments increased by 17 per cent for the FTSE 100, whereas FTSE AIM has increased by a much more attractive 68 per cent. So diversification among UK holdings is essential too. This is also an investment trust sector that Hewitt likes: “The underlying companies are cheap and there’s lots of M&A.”
Globally, dividends can come from areas that investors might not have considered, such as emerging markets. Charles Jillings manages the Utilico Emerging Markets Trust, which has a 4 per cent yield and trades at a -21 per cent discount. He says: “87 per cent of our portfolio pays dividends. You could buy our shares, take the income and wait for value to come through.”
Analysts at Kepler Trust Intelligence highlight the growing prevalence of enhanced dividend strategies. This typically involves taking a contribution from the trust’s capital to top up the portfolio’s underlying revenue to boost the income paid out to shareholders. “It’s really powerful because the manager can just focus on buying the best companies without worrying about the dividend at all,” says McMahon.
There has been a steady increase in trusts adopting this approach, with more than 20 now offering some level of enhanced dividend. To provide clarity to investors, the trust may set out an income goal for the year — Invesco Asia adopted a policy to pay out 2 per cent of its net asset value every six months.
An unusual example is International Biotechnology. As biotech companies do not generally pay dividends, the trust pays a 4 per cent dividend out of capital returns. McMahon says: “You can build a very diverse portfolio of investment trusts for income.”
