The Association of Investment Companies recently revealed its annual list of dividend heroes – seventeen high-performing investment trusts that have raised their dividend payouts to shareholders every year for at least 20 years in a row; seven have done so for fifty years or more – writes Christian Leeming
 
With inflation climbing inexorably towards double digits, 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, BMO Global Smaller Companies 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 55 years of dividend rises; however, the list also includes racier options such as Scottish Mortgage and BMO Global Smaller Companies.

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.
 
Long-term returns of the oldest trusts >
 
The 28 investment trust ISA millionaires >
 





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