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Looking for dividend growth can be misleading, data reveals

By Tom Aylott, Reporter, Trustnet 19 May 2023:

Those investing in trusts for a source of income may consider strong dividend growth as a sign that managers have consistently upped their payouts over a long time, but the data can be misleading.

QuotedData found the 10 portfolios that increased their pay-outs the most over the past decade, but few delivered sustainable growth.

Most of the biggest growers were trusts that had closed down and were repaying capital to shareholders via dividends, as their dividends were unnaturally inflated. As such, they were excluded from consideration.

The remaining portfolios had sizable leaps in pay-outs over the past decade, but did so by changing their dividend policy, ranking them comparatively higher than where they were at the start of the decade.

Typically, these funds have allowed the dividends to be paid by a mixture of underlying dividends from holdings as well as capital gains.

David Johnson, senior analyst at QuotedData, said: “Their ability to hold unconventional assets and tap into their capital account to fund their dividends has allowed many non-conventional strategies to exhibit stellar dividend growth levels, although these are very specific instances and the sort of exponential growth seen cannot be sustainable, which is why it is important to look below the surface.”

While dividend growth is an important factor to income investors, it does not mean a lot if it lacks consistency, according to Johnson.

“Ultimately, the process of ranking trusts by their dividend growth is rife with pitfalls, though it does throw up a few interesting trends that are insightful,” he added.

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