Dividend Heroes for your ISA?

The Association of Investment Companies publishes an annual list of dividend heroes – twenty high-performing investment trusts that have raised their dividend payouts to shareholders every year for at least 20 years in a row; half of them have done so for fifty years or more – writes Christian Leeming

Although inflation is coming down from its double digits highs, income-seeking investors will need to choose wisely just to preserve the real value of their money; if investment income doesn’t grow over time, inflation erodes its purchasing power – for investors that rely on it to pay rising food and energy bills, this is a real and present problem.

However, by making solid choices, and with a long term investment horizon to take advantage of Einstein’s ‘Eighth Wonder of the World’ – compound interest – it is possible to protect your capital.

By way of a demonstration, an investment that yields a 5% dividend (£500 on a £10,000 investment) – but grows at 5%, will return income of around £820 after ten years, rising to £1,360 after twenty; some of the dividend heroes – Alliance Trust and Witan for example  – have grown their dividends consistently by more than 5%.

There are also sound investment reasons to target a growing dividend over a high dividend because if a company is paying a high dividend, it may indicate distress because the market believes that the dividend is about to be cut. Targeting companies that can grow their dividends, rather than those with a high starting dividend can lead a fund manager to better companies, with stronger long-term prospects.

Taking a bow for longevity, familiar old school trusts such as City of London, Bankers and Alliance have served up 57 years of dividend rises; however, the list also includes racier options such as Scottish Mortgage.

The investment trusts with such astonishing growth records have achieved them through some exceptionally difficult market conditions – from soaring inflation in the 1970s to the pandemic, with the global financial crisis, internet bubble and Black Monday along the way.

Generally, investors don’t look to these trusts for excitement; Scottish Mortgage, with its portfolio of fast-growing companies, is the notable exception.

City of London is more typical of a dividend hero with a portfolio of solid UK blue-chips, including British American Tobacco, Shell, Tesco and AstraZeneca.

Bankers is a global portfolio, but also holds a raft of familiar names, including Microsoft, American Express and Apple.

Some trusts combine dividend reliability with strong capital growth. Alliance Trust has seen a real improvement in performance since it changed manager in 2017, whilst Brunner and Merchants have combined dividend consistency with strong performance.

Despite rising interest rates, income is still hard to find and with inflationary pressures rising, the dividend heroes are a fertile hunting ground for those who need a reliable dividend stream from their investment trust.

Dividend heroes

_{Source: theaic.co.uk / Morningstar. Correct at 08/03/24.} 

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “Despite a tricky few years for the dividend heroes, ten investment trusts now have at least half a century of consecutive annual dividend increases. They have continued to raise their payouts through the high inflation of the 1970s, recession of the 1990s, the global financial crisis in 2008 and the pandemic – showing their remarkable resilience.

“There are an impressive 20 dividend hero investment trusts in total that have increased their dividends every year for more than 20 years. Investment trusts have strong track records of dividend growth because they can hold back up to 15% of the income they receive each year. This allows them to hold more income in reserve when times are good to pay out in leaner years, providing a smoother flow of dividends to investors. Whilst dividends are never guaranteed, investment trusts’ dividend track records demonstrate their durability.”