A few investment trusts have raised their dividends for more than 40 years.
I wrote last month about Investment Trusts and what Foolish investments they can be.
An investment trust is a company that takes a pool of cash from investors when it is formed, and uses that cash to make investments itself. An investment trust is a quoted limited company itself, and is actually owned by its investors, who receive shares. This is unlike unit trusts or open-ended investment companies (OEICs) which are owned by investment companies and take regular payments from investors -- if you want to invest in one of those, you simply send them some money.
If new investors wish to invest in an investment trust, they cannot simply send money to the trust managers they way they would with a unit trust. Instead, they have to buy the shares on the open market from existing shareholders, and it is through this market that shareholders can realised their gains (or losses).
But what's this got to do with dividends? Well, like any managed investment, investment trusts can be set up with various investment goals, including aiming for capital growth, or going for dividend income, or a combination of the two. Some of those solely aimed at income will invest in a basket of high-yielding shares, similarly to some of the investing strategies that a number of Fool regulars discuss on our High Yield discussion board, though most will at least aim to procure growing dividends.
And how well do they do? According to a report just released by the Association of Investment Companies, some of them do very well indeed.
People investing for income to help meet their living expenses need not just regular dividends, but dividends that increase year on year in order to keep track with inflation. Not many individual companies can keep doing that every year for decades, but 15 investment trusts have done just that for at least 26 years in a row.
And the top five have raised their dividends every year for a staggering 40 years or more. The City of London Investment Trust (LSE: CTY) has increased its dividend for 43 straight years, closely followed on 42 years by Alliance Trust (LSE: ATST), Bankers Investment Trust (LSE: BNKR) and Caledonia Investments (LSE: CLDN), with Albany Investment Trust (LSE: ABNY) making up the top five with a 40-year run.
How can they do it? Part of the reason is that, with an investment trust being a company in its own right, any dividend income it receives from the shares it holds belongs to the company, and it can decide how much of that to pay out in dividends each year. This means that in good years, trusts that aim to provide regular income can, like Aesop's ant, hold back some of the goodies to help maintain payouts in leaner times.
Unit trusts, on the other hand, are legally obliged to distribute all of their income each year to their shareholders. So in general, income from an investment trust should be smoother year-on-year, with unit trust income being more volatile. Volatility is not what most income investors want. And as we also saw last time, when it comes to overall returns, including capital growth, the odds are stacked in favour of investment trusts.
With interest rates from savings accounts being so meagre these days, it is understandable that so many income investors turn to investment trusts. And you know what, if you take a look at the share prices of the big five above, you'll find they haven't done badly either.
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