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Income, Dividends And Yields

 Income, Dividends And Yields

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One of the main attractions of investment companies is income. Investment companies collect dividends, interest and rents from assets owned and, after deducting running costs, pay dividends to shareholders. The dividend per share, expressed as a percentage of the share price, is known as the yield.

Unlike open-ended funds, investment companies can hold back some of this income in reserve. Ordinary investment trusts can retain up to 15% of all income. For property rental income in real estate investment trusts (REITs), the figure is 10%. All investment companies can then dip into these reserves if necessary to maintain or even increase dividends.

The capacity to use revenue reserves to smooth out dividends gives investment companies a big advantage over open-ended funds. There are many investment companies that have a record of increasing their dividends every year for the last 20 years. That’s good news for those investors relying on dividend payments to meet everyday costs of living.

It used to be the case that investment companies could only pay dividends out of income but since 2012, they have been able to pay dividends out of capital profits as well. For example, some funds, such as some private equity funds, that normally do not have sufficient income to pay a decent dividend, now pay out a percentage of their NAV each year. Comparing companies’ earnings against the dividend paid gives the dividend cover (earnings divided by dividend). Low dividend cover might suggest that a company is paying out a large proportion of its earnings as dividends and so may not have so much to pay out in future. Each month at QuotedData, we publish the dividend cover figures on all investment companies that have recently declared their full-year dividend.

When companies announce dividends, they tell you the size of the dividend, the pay date (when it should hit your bank account), the record date (you will be paid the dividend if your name appears on the share register on this date) and the date on which you have to own the shares to be entitled to the dividend (the ex-dividend date). The share price usually drops on the ex-dividend date to reflect the fact that the right to a dividend payment fall away.

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