Diverse Income’s strengths shine – Diverse Income Fund’s results covering the year ended 31 May 2020 show it beating comparative indices by some margin. Over the year, Diverse Income returned -2.5% while the All-Share returned -11.2%. Total dividend for the year was 3.7p, up from 3.65p. £2.5m of dividends paid to shareholders came from revenue reserves. The company still had £15m in reserve at 31 May. The return to shareholders was -1.2%. Investors recognised the strength of Diverse Income’s strategy and the discount narrowed.
One reason for the outperformance was the FTSE100 put option that the trust was holding to insure against a market fall. This was cashed-in in March. The £20m sale proceeds were used to buy stocks at cheap prices.
The managers say that “this year, the gold mining holdings, such as Centamin and Highland Gold for example, boosted the Trust’s return by 1.8%. Alongside, the holdings in spread betting businesses, including CMC Markets, IG Group and Plus500, also enhanced the Trust’s return by 1.9% this year. Second, many of the small cap portfolio holdings have been on overlooked valuations relative to their prospects. With the political uncertainty during 2018 and 2019, many small cap valuations were even more overlooked than usual. When small cap stocks stand on such undemanding valuations they are vulnerable to being taken over for cash at a significant premium, and this year the Trust’s portfolio has lost more than usual to a stream of cash takeovers. During the year, the three takeovers that boosted the Trust’s returns the most were of Charles Taylor, Haynes Publishing and KCOM which together enhanced the Trust’s return by 1.6%.”
“some individual portfolio holdings… disappointed over the year. Many of the poor outcomes this year were amongst the lending institutions in the portfolio. The Trust’s holdings in Lloyds and The Royal Bank of Scotland for example passed their dividends during March and April 2020, and their share price setbacks detracted 1.2% over the year. Furthermore, Amigo and Morses Club had individual specific disappointments, cut their dividends and together detracted 2.5% over the year. Given their limited dividend prospects, most of these holdings have now been sold, with the exception of Morses Club which is expected to resume dividend payouts before long.”
Income prospects
“In general, corporates have borrowed additional cash easily for years. During this period, even when individual companies did run short of internal cashflow to pay their dividends, it was often easy to maintain dividend payments by taking on additional debt.
Many businesses will now become less profitable, or even loss-making with the pandemic, and the global recession. Whilst this is a challenge for many, it is particularly difficult for companies with major debt balances. Lesser profitability implies lesser internal cashflow, so it may become even harder to sustain dividend payments, with some falling foul of loan covenant ratios as well. Given the potential severity of the global recession, numerous quoted companies have chosen to pass their dividends and retain the cash in their businesses.
As the Trust starts a new financial year, the prospects for dividend income are already improving taking into account the payment of dividends that had been deferred and the reinstatement of dividends from companies that had previously cancelled.
The sale of the Put option generated an extra £20m of cash for the Trust, that was available to be invested in new income generating stocks. In addition, the share prices of certain holdings in the Trust’s portfolio have risen so as these are sold and replaced with higher dividend paying holdings, this tends to boost the Trust’s revenue. In time, we also expect some of the companies that passed their dividends to resume again. Overall, the Trust’s dividend revenue has already started to recover, and in time it is anticipated that it will exceed the current annual dividend of 3.70p per share. When it does, the Trust will be in a position to increase dividends to shareholders as it did previously without drawing on reserves.”
[Generally, funds investing for UK equity income have had a difficult time of it over 2020. Diverse Income has done better than most, however. The whole ethos of the fund is to avoid depending on a handful of stocks for dividend income – other funds and managers that stuck with big positions in oil companies and banks have fared much worse. Diverse income still had to draw on reserves to maintain its dividend but this is the great strength of using trusts for income rather than open-ended funds. We would hope that more investors recognise this quality and are drawn to trusts such as this.]
DIVI : Diverse Income’s strengths shine