Trust in the market: finding income during a crisis

As many companies cut dividends during lockdown, investors are looking elsewhere for income. These trusts could offer a better yield in a difficult market

Article updated: 27 May 2020 9:00am Author: Alice Rigby

All of us have been bruised by the markets in this pandemic period, but for income investors the blow has hit particularly hard. Companies across the market cap spectrum have suddenly and unexpectedly cut their dividends. This trend culminated in the first dividend cut by Royal Dutch Shell – the UK’s largest dividend payer – since World War Two.

The financial industry has responded to this crisis by pointing income investors in a bewildering array of directions. From investing in risky “junk bonds” to looking to highly alternative income streams, these suggestions are not without merit.

However, investment trusts are more suited to an income crisis than most funds. With their unique structure allowing them to produce dividends in a variety of ways, many offer a stable source of yield in a period when yield is anything but. Here, we discuss a few of the options available to investors in the current market.

International Biotechnology Trust – paying income from capital

IBT has paid a dividend since 2016, when its shareholders voted for it to become part of the trust’s investment policy. It has committed to paying 4% of NAV each year in a dividend, which, unusually, it pays from capital. This means that the trust is not dependent at all on its own dividend income for generating a dividend for its shareholders.

This is particularly important in IBT’s case as the companies in the sectors it invests in – biotechnology and healthcare – do not traditionally lean toward paying dividends. Yet, if the last few months have shone a light on anything, it is the vital importance of these sectors to our functioning as a society.

Naturally, this has prompted something of an uplift among biotechnology company valuations. However, this trend is no flash in the pan. With ageing populations the world over, the need for medical interventions increases year‐on‐year. IBT’s manager, Dr Carl Harald Janson, and his expert team apply their specialist knowledge to identify the companies that are meeting this need most dynamically – or that look set to do so in the future.

This expertise has proved useful. Over five years, the trust has outperformed the AIC Biotechnology and Healthcare sector by almost 8%. 

Alliance Trust – paying income from revenue reserves

A final unique function of the investment trust structure is trust’s ability to keep aside a proportion of previous year’s income to cover future dividend payments. This enables trusts to boost their dividends in periods when those dividends come under pressure, like now.

ATST is one of the AIC’s ‘dividend heroes’, having increased its dividend consistently for 53 years. The board is keen to maintain this track record, and has a strong level of revenue reserves on which to call, should revenues from the trust’s investments fall, as they are likely to do in the current period.

In fact, we calculated in January that the trust had 2.38x its historic dividend, plenty to weather a stormy year or two.

In 2017 the trust was radically overhauled by its board, which had resulted in some reduction in its revenue income even before the crisis. However, it means instead that investors are experiencing strong, stable capital growth, meaning that trust is a promising option for those looking for a degree of growth and income.

Greencoat UK Wind – alternative assets with a strong income stream

Reassuringly for income investors, UKW’s main objectives are to pay a high dividend to shareholders that is linked to inflation (RPI), and to preserve capital in real terms. The trust paid a dividend of 6.94p for 2019 and has a target for 2020 of 7.1p per share, representing a 2.3% increase in line with RPI for December 2019.

It generates this through a portfolio of institutional‐quality wind farm assets. Crucially, these assets – and their incomes – are supported by highly favourable government policy, with the pressure to combat climate change over the long term undimmed by events even as significant as a pandemic. Retail investors are able to comfortably access these assets through investment trust structures, as trusts’ public listing and fixed capital bases do not risk liquidity should an investor need to redeem their capital. The trust is the largest in this space, and with that has come several benefits of scale – including a declining OCF as it has become larger.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Alice Rigby

Marketing Manager, Kepler Partners

Alice manages the production and distribution of content at Kepler Trust Intelligence, an online research hub for professional and private investors. She was previously a financial journalist at Investment Week and an investment writer at Hermes Investment Management.

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