Will the the current dividend cutting spree decimate the payouts from the Investment Trust Dividend Portfolio?
During the 2008 crash maintaining dividend payments was seen by companies as sending a sign to the markets that their finances were strong. What we are now seeing in the Covid-19 induced crash is social and governmental pressure on companies to stop dividend payouts in order to protect jobs. Tesco have just confirmed their dividend payment but prior to their announcement it was the centre of a media furore as they along with many others in the retail sector are benefiting from significant business rates cuts so there is a real issue of whether companies that are receiving high levels of support should be paying out to shareholders rather than giving this money to their employees and/or society.
Currently the dividend payout from the FTSE 100 is forecast to fall from £90bn to £75bn and there is probably more bad news to come with speculation that up to 50% of companies will eliminate dividends (Citywire “UK dividends could halve as coronavirus puts £52bn at risk“). Clearly there are companies whose finances demand a cut in dividend payouts and others who for PR reasons will be unable to pay and others who will take this opportunity to cut without incurring the usual fallout from such a cut. The outlook is therefor grim for the dividend investor
Investment Trusts have big advantage over OEICs in that they can hold back up to 15% of income and use these reserves to pay dividends during lean years. All the Investment Trusts in the portfolio except for HICl and City of London have more than 1 year of dividend coverage.
| RETIREMENT INCOME TRUST PORTFOLIO | ||||
| COMPOUND ANNUALISED TOTAL RETURN 2007-2019 | YIELD MARCH 2020 | 5 YEAR DIVIDEND GROWTH | DIVIDEND COVER YEARS | |
| North American Income | 13.2% | 3.2% | 9.5% | 1.33 |
| Schroder Oriental Income | 9.6% | 4.5% | 5.7% | 1.15 |
| JPMorgan European Income | 6.3% | 4.6% | 7.1% | 1.15 |
| JPMorgan Claverhouse | 5.3% | 4.1% | 7.7% | 1.48 |
| City of London | 5.7% | 4.8% | 4.7% | 0.76 |
| Schroder Income Growth | 5.6% | 4.6% | 4.4% | 1.39 |
| HICL Infrastructure | 6.9% | 4.7% | 2.5% | NA |
| Murray International | 8.2% | 4.9% | 3.7% | 1.07 |
| AVERAGE | 7.6% | 4.4% | 5.7% | |
There have however been various analyses in the financial press of the sustainability of Income Investment Trusts dividend payouts (Investors Chronicle, Trustnet). One of the most insightful analyses is from JPMorgan Cazenove that examines the impact on trusts´ reserves on the basis of dividend cuts (revenue) announced to date and on the basis of a 60% cut in revenue.
|
Investment Company
|
Current revenue reserve dividend cover **
|
% in dividend cutters
|
Dividend cover after cuts to date
|
% of revenue reserve used
|
Dividend cover after est. 60% cut in revenue
|
% of revenue reserve used
|
|
Aberdeen Standard Equity Income (ASEI)
|
1.15
|
22.4
|
0.80
|
17%
|
0.37
|
55%
|
|
BlackRock Income & Growth (BRIG)
|
1.70
|
23.9
|
0.73
|
16%
|
0.29
|
41%
|
|
BMO Capital & Income (BCI)*
|
1.29
|
29.1
|
0.78
|
17%
|
0.39
|
47%
|
|
City of London (CTY)*
|
0.83
|
22.9
|
0.80
|
24%
|
0.39
|
74%
|
|
Diverse Income Trust (DIVI)
|
1.25
|
20.9
|
0.83
|
13%
|
0.36
|
51%
|
|
Dunedin Income Growth (DIG)
|
1.45
|
11.7
|
0.88
|
8%
|
0.32
|
47%
|
|
Edinburgh Investment (EDIN)
|
1.52
|
16.7
|
0.84
|
11%
|
0.35
|
42%
|
|
Finsbury Growth & Income (FGT)
|
1.34
|
0.7
|
1.09
|
-7%
|
0.39
|
46%
|
|
Invesco Income Growth (IVI)*
|
1.11
|
23.0
|
0.77
|
21%
|
0.33
|
61%
|
|
JPMorgan Claverhouse (JCH)*
|
1.54
|
22.8
|
0.80
|
13%
|
0.36
|
41%
|
|
Law Debenture (LWDB)
|
1.30
|
14.1#
|
0.88
|
9%
|
0.62
|
29%
|
|
Lowland (LWI)
|
1.14
|
39.6
|
0.64
|
32%
|
0.38
|
54%
|
|
Merchants (MRCH)*
|
1.00
|
31.3
|
0.70
|
30%
|
0.37
|
63%
|
|
Murray Income (MUT)*
|
1.11
|
18.3
|
0.82
|
16%
|
0.36
|
58%
|
|
Perpetual Income & Growth (PLI)
|
0.89
|
16.2
|
0.83
|
19%
|
0.34
|
74%
|
|
Schroder Income Growth (SCF)*
|
1.43
|
30.3
|
0.75
|
17%
|
0.37
|
44%
|
|
Shires Income (SHRS)
|
1.71
|
15.3
|
0.81
|
11%
|
0.29
|
42%
|
|
Temple Bar (TMPL)*
|
1.08
|
46.7
|
0.50
|
46%
|
0.34
|
61%
|
|
Troy Income & Growth (TIGT)
|
0.73
|
10.1
|
0.87
|
18%
|
0.31
|
95%
|
|
Value and Income (VIN)*
|
0.52
|
7.4#
|
0.78
|
41%
|
0.25
|
144%
|
|
Average
|
1.21
|
0.80
|
19%
|
0.36
|
58%
|
City of London who have just confirmed an increase in dividend is one of the most vulnerable trusts and in the event of a 60% reduction in revenue will use up 74% of its revenue reserves. Value and Income is most at risk and has insufficient reserves to cover current dividend levels.
Only one year of sustained payouts are considered in the above table. So if many FTSE companies continue to freeze or reduce dividend payouts the Income Investment Trusts will be required to revamp their portfolios to eliminate the poor payers and possibly rely on capital redemptions to sustain dividends.
The table below shows the annual dividends for the Income Portfolio based upon a £10,000 investment made 5/1/2018. Dividends increased 4.7% from 2018 to 2019. I suspect that we shall be very lucky to see a positive change for 2019 to 2020!
