Dividend cover of trusts

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Which UK equity income investment trusts have the best dividend cover?
‘Reliable source of income’

David Brenchley, Investment Week, 31 March 2020

Two-thirds of income-focused UK equity investment companies have enough cash in reserve to pay one year’s dividend to shareholders, data from the Association of Investment Companies (AIC) for Investment Week shows.

Income seekers investing in listed shares of UK companies are currently at risk of losing out on billions of pounds in dividends, as a cessation of economic activity due to an enforced lockdown to stem the spread of coronavirus forces firms to cancel, cut or delay their payouts.

Companies cut more than £1bn worth of dividends between 17 March and 26 March, according to estimates from platform interactive investor. UK futures, meanwhile, are currently pricing in a fall in dividends of around 30% for 2020.

As a result, “it would be remiss of us if we were not worried” about open-ended funds’ ability to maintain dividend payments, Sheridan Admans, investment manager at The Share Centre, said.

However, investment trusts are able to move surplus income every year into a revenue reserve they can call upon when dividend payments are hard to find.

“Unlike open-ended funds, which distribute whatever income comes in, investment trusts can smooth their dividends – saving money in reserves in the good times and using this to top up any shortfall in income in difficult years,” said James Carthew, head of investment company research at QuotedData. “This makes investment trust dividends a more reliable source of income for investors.”

‘The rainy day has now arrived’

Investec analyst Alan Brierley noted that while many listed firms were forced to significantly slash dividend payments during and in the aftermath of the 2008 financial crisis, 11 out of 14 UK equity income investment companies still increased dividends, while the only dividend cut was one of 7%.

“The AIC’s many dividend heroes will be keen to maintain that status. We’d expect few if any dividend cuts from this group of funds,” predicted Carthew.

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