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Can investment trusts survive the UK dividend drought?

Biotech trust Trump benefit may be shortlived

Can investment trusts survive the UK dividend drought?

By Dave Baxter

UK dividends have evaporated in the past few months, with no imminent recovery in sight. Link Asset Services predicts that UK dividends could fall by between 45 and 49 per cent on a headline basis in 2020 versus the previous year’s total, based on its best- and worst-case scenarios…

Are reserves enough?

Some UK equity income investment trusts have large revenue reserves, as the chart shows. But analysts at broker Stifel point out that the majority of trusts in this sector have not published a forecast of what their future dividend levels might be…

James Carthew, head of investment companies research at QuotedData, notes that further cuts could be a possibility. “When you look at the yields now on offer [from trusts] they really are very chunky,” he says. “There are lots of them in the high fives, some in the sixes and some in the sevens [per cent]. That could show that stocks are silly cheap or these yields are too high.”

So even trusts with reserves could rebase their dividends lower. This may be a positive development in the longer term if it makes such payouts more sustainable, but could leave their shareholders with an income shortfall in the immediate future…

Funds for beating the income drought

A problem that both UK equity income investment trusts and open-ended funds have is dividend concentration…

Mr Carthew points out that some UK equity trusts are diversified via exposure to other assets. Law Debenture Corporation, for example, has a trustee business that acts as an extra source of income. See our interview with Law Debenture Corporation’s manager in the issue of 17 July. And Value & Income holds property as well as equities, although this approach has come under severe pressure during the current crisis.

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