Will 2020 be the year that the so-called “dividend hero” trusts finally fall to earth?
These are the quoted funds that have increased their dividends annually for at least the past 20 years. Some have managed to raise the payment every year for more than half a century.
We can be sure that the board of any trust that has not failed to raise its divi for many decades will move heaven and earth to avoid a cut now. Equally, the pressure on income funds is huge: hundreds of listed companies have cut or suspended their own dividend.
Even Shell, which had not cut its dividend since the war, reduced it by two thirds last week. The company, which paid the highest divi in cash terms on the London market and the second highest in the world, is a mainstay of many income-focused funds and investment trusts.
Across the stock market as a whole, about 50pc less could be paid to shareholders in dividends this year, judging by special “futures” instruments designed to predict the payments.
So will the dividend heroes retain their status or will the flood of cuts overwhelm them?
Trusts do have weapons in their armoury. Although I have heard the odd fund manager describe such tricks as buying a stock briefly just to qualify for its dividend, the main defence against dividend cuts for investment trusts is their “revenue reserves”.
These are amounts, not necessarily held in cash, that represent income received in the past but not paid to shareholders at the time. Instead, the reserves can be used to bolster the income from the trust’s holdings in times of stress in order to maintain or even increase its divi.
We can get a good idea of the depth of a trust’s reserves by comparing them with the total amount it paid in dividends in the previous year. If a trust distributed £2m in divis last year and has £1m in its revenue reserves, they would support 50pc of a year’s divi.
Researchers at Panmure Gordon, the stockbroker, recently calculated this “reserves to dividend” ratio for a large number of trusts. We’ll look at what they said about the dividend heroes in particular.
Holding out for a hero
Four trusts have clocked up more than 50 years of consecutive dividend increases: City of London, Bankers, Alliance Trust and Caledonia. Of these, Alliance Trust is in the strongest position in relation to reserves – it has enough to cover 2.4 years’ worth of dividends, Panmure said. Bankers has 1.8 years and City of London 0.8 years (note that these figures are different from those reported here five weeks ago, which looked at reserves after a hypothetical 30pc fall in trusts’ own dividend income).