Alliance Trust, Murray Income and Henderson Smaller Companies are the three investment trusts with ‘Dividend Hero’ status worth adding before this year’s ISA deadline, according to Bestinvest managing director Jason Hollands.
There is less than a month left to get cash into an ISA and one option for investors looking for dependable income is to consider investment trusts with a strong track record of increasing their dividends.
The ‘Dividend Hero’ list, produced by the Association of Investment Companies, aims to make this simple, highlighting those that have upped their payouts every year for 20 or more years.
Three make Bestinvest’s Best Funds list. Below, Hollands outlines the case for each.
Alliance Trust
With a yield of 2.1% and annualised five-year dividend growth of 13.2%, the FTSE 250-listed trust has provided investors a good balance of income and growth opportunities, said Hollands.
Over the past decade Alliance Trust has been the third-best trust in the 13-strong IT Global sector, making almost 90 percentage points more than the average peer and 29 percentage points more than the benchmark.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
It takes a multi-manager approach, delegating its cash to different fund management groups who run small, high conviction portfolios.
The result is a 200-stock overall investment trust, which the Bestinvest managing director said “means lower volatility than some equity funds can be expected”.
Household names such as Alphabet, Nvidia, Microsoft, Amazon and Visa make up the trust’s top five holdings, comprising around 15.6% of the total portfolio.
Alliance Trust aims to beat the MSCI ACWI benchmark over time with total returns supported by consistent, rising dividends: the trust has increased its income payout each year for the past 57 years.
“This is an efficient option for someone looking for broad, global equity exposure with a core investment,” Hollands said. Investors can pick the trust up on a discount of 5.1% compared with the underlying net asset value (NAV).
Murray Income Trust
Charles Luke’s Murray Income Trust is a higher-yielding option, paying out a yield of 4.57%, but has been a slower dividend grower – it’s five-year annualised growth rate of 2.4% is far below Alliance Trust’s.
Yet the portfolio has a place on Best Funds list thanks to its “consistent long-term performance, especially in weaker market environments”, said Hollands.
It has just hit 50 years of consistent dividend increases and is on a wider discount of 10.5%, despite top-quartile performance over five and 10 years.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
Murray Income invests in large-cap UK companies, with Luke focusing on those with healthy balance sheets, experienced management teams and strong corporate governance. He also looks at earnings growth and the valuation, before making any trades.
“He takes a ‘patient, buy and hold’ investment approach, investing in stocks for the long term,” said Hollands, and supplements his UK stocks with some overseas names “to boost diversification”.
Henderson Smaller Companies
Lastly, it has been a tough market for UK small-caps but Hollands said that he “remains confident” in the prospects of this mid-to-small-cap trust.
“Veteran investor Neil Hermon has been the fund manager since November 2002 and his approach has remained consistent, with a focus on picking individual companies and keeping faith with winners,” Hollands said.
This has led to some short-term performance blips in the past, indeed Henderson Smaller Companies has failed to beat its average peer over the past decade, as the below chart shows, thanks to a challenging past three years.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
It has raised dividends in 20 years, making it a new entrant to the Dividend Hero list, and currently yields 3.29%, while its five-year annualised dividend growth rate stands at 4.4%. Shares can be snapped up at a 13% discount to NAV.
Why now?
Hollands noted that the two UK trusts (Henderson Smaller Companies and Murray Income) are particularly attractive this ISA season given the strength of the US market and relative weakness of domestic stocks.
Investors have “flocked to US and global equity funds” over the past few years, but now could be a chance to diversify with these names.
“Let’s not forget two of the London market’s key attributes – along with, at the moment, very attractive valuations: high dividend yields that are very useful for income investors, and the presence of a wide variety of listed investment trusts and investment companies that can provide investors with well diversified portfolios,” said Hollands.
Alliance Trust meanwhile takes its place on the list as a good option “for ISA investors who have more of a growth outlook”.
“Alliance Trust has a particularly strong recent track record,” he said.