Stands out in a competitive peer group: Dunedin Income Growth

DIG offers several differentiating features which help it stand out in a competitive peer group…by Josef Licsauer

This trust has been awarded a rating by Kepler for growth …Find out more
 

Overview

 
The managers of Dunedin Income Growth (DIG) employ a balanced approach, focussing on quality companies that meet their sustainable and responsible investment criteria, and those they deem best placed to deliver both attractive total returns and real income growth over the long term. This strategy has proven successful over the years, demonstrated by DIG’s dividend track record and long-term Performance profile.

Despite some current market uncertainties, particularly regarding geopolitical tensions and the timing of rate cuts, the managers believe UK equity valuations remain attractive. They argue that an improving economic backdrop combined with low starting valuations could be a powerful source of returns moving forward (see Portfolio). They’ve found opportunities across the market, resulting in a number of new positions being initiated into the portfolio, including large-cap names like National Grid and Convatec, and mid-cap opportunities such as Genuit Group, a plastic piping company.

The managers also focus on generating sustainable, long-term Dividend growth that can withstand market stress, rather than simply chasing the highest yields. To achieve this, the managers emphasise income resilience through market cycles and diversification of their underlying income streams. The result is a portfolio comprised of UK-based companies with global exposure, whereby they can generate significant portions of their revenue internationally, as well as exposure to overseas investments for diversification. Additionally, the managers employ a modest option-writing programme, expected to contribute 5-10% of the income generated, affording them headroom to invest in the more non-traditional areas, including smaller companies, which may offer lower starting yields but stronger dividend and capital growth prospects.

Currently, DIG trades at a 10.5% Discount, much wider than its five-year average and the sector’s 3.6% average.
 
DIG has been awarded a Kepler Growth rating for 2024.

Analyst’s View

 
One of the most appealing aspects of DIG’s portfolio is its attractive Dividend profile, particularly the emphasis the managers place on providing a steadily growing, yet resilient income. Ben Ritchie and Rebecca Maclean employ various strategies to ensure income sources are diverse, so in times of market stress, DIG’s income generation capabilities have the potential to hold up better than the market.

Beyond targeting quality UK companies, moulded within their sustainable framework, the managers allocate a portion of the portfolio to overseas businesses, enhancing their income stream diversity. Additionally, they leverage an option-writing programme, which affords them the flexibility to fish further down the market-cap scale for differentiated opportunities of dividend growth. This approach has earned DIG a place on the AIC’s next generation of dividend heroes list, having increased its dividend for 13 consecutive years.

Whilst DIG has demonstrated good long-term performance, we think it’s important to acknowledge that its strategy may lead to periods of underperformance, as seen in the past 12 months, due to its allocation to mid-cap companies and underweight to cyclical financials and commodity sectors (see Performance). However, we think DIG’s portfolio is well-positioned to capture returns should the economic backdrop improve and particularly if investor sentiment towards UK equities strengthens.

DIG’s double-digit Discount, which is much wider than its five-year average, may also appeal to investors seeking differentiated exposure to the UK market, as well as a growing and resilient income. If sentiment returns and DIG’s performance picks up, then we see potential for the discount to narrow back towards its long-term average, boosting shareholder returns.

Bull

• Highly differentiated approach, with a focus on sustainability, to both the peer group and index
• Well-diversified list of UK businesses that also derive revenues overseas
• Use of option writing gives managers greater flexibility to invest across the market cap spectrum

Bear

• Gearing can magnify gains on the upside but also losses on the downside
• Exposure to mid-cap companies may bring more sensitivity to the UK economy
• Balanced investment approach may lag a style-driven market

 
See the full research on DIG here >
 

 

Disclaimer

This is a non-independent marketing communication commissioned by abrdn. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.