Schroder Income Growth (SCF) has dipped into revenue reserves for a fourth year in succession to maintain its “dividend hero” status and achieve 31 consecutive rises in the annual pay-out to shareholders.

Full-year results yesterday showed quarterly dividends rose 4.1% to 15.3p per share but in what continues to be a “challenging” environment for investment income, earnings per share of 13.62p fell short of what the board wanted to pay, despite an 8.5% increase.

“Dividend hero” has been coined by the Association of Investment Companies trade body for trusts that have unbroken dividend records of 20 years or more. It is a much-cherished accreditation that investment company boards are keen to protect.

In his last annual statement before retiring, chair Ewen Cameron Watt reiterated the board’s priority was to achieve real dividend growth ahead of inflation, which he said was more important than growing the size of the £237m investment trust.

He said SCF’s dividends had grown faster than inflation over one, three and 10 years.

However, this ambition comes at a cost. With just 89% of its dividends covered by earnings, the 4.2%-yielder revealed that revenue reserves, which it uses to supplement the pay-out when dividend income falls short, had declined to £3.3m, equivalent to 5.07p per share or just three months of the annual distribution.

Cameron Watt and fund manager Sue Noffke said a surge in the amount of money companies spent on buying back their undervalued shares meant that dividends from UK companies remained below their levels in 2019.

Nevertheless, Schroder Income Growth had increased its payout by 23% over the same period.

Noffke, who is also Schroders head of UK equities, admitted her decision to take profits in some high-yielding, dividend growers in the financial sector, such as Lloyds bank, Standard Chartered, TP ICAP and 3i Group (III), had been a factor, as had been dividend cuts by drinks giant Diageo and housebuilder Taylor Wimpey.

However, she pointed out that overall dividend income was “broadly unchanged” at £10.3m, while corporate earnings were strong. When share buybacks were included, total capital returned to shareholders had been significantly higher than before the 2020 pandemic.

“Buybacks have averaged around £50bn annually since 2022 and, alongside dividends, have taken total annual shareholder distributions to around £140bn, above the comparable level in 2019,” she said.

While UK company buybacks have diverted money from dividends, the trust’s own buybacks helped ensure shareholders’ return beat the FTSE All-Share. Buying back shares that currently trade 6% below net asset value (NAV) had narrowed the discount and provided a 23% return, including dividends, that was ahead of the benchmark’s 21.3%. That was helpful as the underlying investment return from Noffke’s stock picks was 19%.

The chair pointed out that since Schroders started managing the trust in July 2011, the company has delivered an annualised total NAV return of 8.7%, compared with 8.1% for the FTSE All-Share.

And, while revenue reserves had dwindled, he said Schroder Income Growth had plenty of additional capital reserves that it could distribute through dividends.

Our view

Richard Williams, senior analyst at QuotedData, said: “Solid absolute returns for SCF fell short of its benchmark gain, with weakness in consumer discretionary holdings proving a particular drag. More encouragingly, however, the trust delivered its 31st consecutive year of dividend growth and maintained its record of growing income ahead of inflation over the longer term. The manager has taken advantage of recent market volatility to reposition the portfolio, notably adding to RELX and establishing a position in LSEG following AI-related sell-offs, reflecting a belief that the market is underestimating the resilience of their proprietary data and established customer relationships. Meanwhile, share buybacks equivalent to 4.4% of SCF’s issued capital helped narrow the discount and lift the share price total return to 23.0%. The combination of an active approach to discount management and a strong long-term dividend record remains attractive, although restoring full dividend cover would provide additional reassurance.”