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Trust dividends are falling – buy these four funds to protect your income

·4 min read

Investment trust dividends have fallen for the first time in a decade but investors who buy the shares of the brightest prospects can still secure high and growing payouts.

Payouts from trusts investing in shares fell 3.1pc in the first six months of 2021 compared with the same period last year – the first fall since the second half of 2010.

Three in 10 trusts cut their dividends, doing so by an average of 23pc, according to Link Group, a data firm. Those investing in British dividend-paying stocks accounted for the bulk of the falls.

This included the £720m Temple Bar Investment Trust, which cut its dividend for the first time in more than half a century in 2020. The 38.5p per share payout was down 25pc from 2019.

The £250m Troy Income & Growth Trust is paying out 1.96p per share this year, down 29pc on last year, while the £1bn Edinburgh Investment Trust, which held its annual dividend at 28.65p per share, has warned next year's payout will fall to 24p.

But income seekers can still find high and growing payouts. Ewan Lovett-Turner, of stockbroker Numis, pointed to JP Morgan Claverhouse Investment Trust and City of London Investment Trust, two trusts investing in British dividend-paying stocks that resisted cuts, despite companies cutting their own payouts.

“City of London has managed 55 years of dividend growth and JP Morgan Claverhouse 48 years. They both have diversified portfolios and excellent fund managers,” he said.

City of London's last quarterly payout for its 2021 financial year will be made at the end of this month and will bring the annual payout to 19.1p per share, up from last year's 19p – putting the shares on a 4.8pc yield.

Mick Gilligan, of wealth manager Killik & Co, said City of London was the “gold standard” for income trusts because its board put income at the core of its strategy, and highlighted reserves the trust could draw on to supplement its dividend.

Trusts are allowed to hold back 15pc of the income they receive from stocks each year to boost dividend payments in lean periods, and they can also use profits from selling shares at a higher price then they paid for them.

“City of London has plenty of revenue reserves and would dip into capital reserves to keep up its record,” said Mr Gilligan.

Mr Lovett-Turner said JP Morgan Claverhouse also boasted healthy reserves. The trust last year paid out 29.5p per share, up from 29p in 2019, and has announced 7p dividends for its first three quarterly payouts in 2021, up from 6.5p last year. The shares trade on a 3.9pc yield based on last year's dividend.

“Claverhouse’s board wants to increase dividends ahead of inflation every year and has the reserves to deliver on this, while City of London has an even longer record of commitment to increasing payouts,” said Mr Lovett-Turner.

He added that some of the trusts that cut dividends still represented strong investments, given they can now grow payouts from the smaller base.

Mr Lovett-Turner highlighted Troy Income & Growth. This year's 1.96p dividend place the shares on a 2.5pc yield, lower than that for rival income trusts, but a switch in investment style should lead to growing payouts from the shares it buys.

“The cut was flagged before Covid-19 hit so should not have come as a surprise to investors. It has shifted away from buying high-yielding stocks to companies that have lower yields but can grow dividends sustainably. This has meant switching out utilities for stocks such as Unilever and credit data group Experian,” he said.

Mr Gilligan added that prospects for the Edinburgh Investment Trust were improving after a change in manager, from Invesco's Mark Barnett to James de Uphaugh and Christopher Field of Majedie.

“It was blighted by expensive debt it took out when interest rates were high but it pays this all off next year. It also has a new manager, Majedie, who took over from Invesco, which could help close its 9pc discount,” he said.

Shares in the trust trade on a 3.9pc yield based on next year's 24p annual dividend but the trust's board has said it expects payouts to “grow progressively in future years”.

Link said the fall in investment trust dividends should be seen in the context of the slump from the stock market last year as the pandemic struck. Dividends across the globe have fallen 6pc while payouts from British stocks are down 35pc. Despite this, trust dividends are up by 2pc on average since the start of 2020.