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How you can dodge the coronavirus dividend strike

How you can dodge the coronavirus dividend strike: Investors should choose trusts that have put aside money for rainy days


PUBLISHED: 21:51, 10 April 2020 | UPDATED: 09:59, 11 April 2020

The much-publicised move by the big banks to cancel their dividends has left investors with mixed emotions and many questions…

The hundreds of thousands of investors in equity income funds are among those affected. As interest rates have tumbled, these funds have been a haven for savers fleeing bank deposit accounts.

But many of these funds will be forced to reduce their generosity, especially if they are open-ended, formerly known as unit trusts. These have to sell their underlying holdings if investors want to pull out.

By contrast, investment trusts which are closed-ended (with a limited number of shares) have more room for manoeuvre …

James Carthew of QuotedData, the investment research business, says that this may be the moment to be grateful for the flexibility of investment trusts.

They can put aside 15 per cent of revenues to boost payouts in testing times and also use capital, if required.

He says: ‘These are safeguards against rainy days, and those rainy days are here.’

This concession means that 20 income trusts, including Scottish Mortgage and F&C, have been able to maintain their dividends for more than 20 years, even through the global financial crisis of 2008.

Annabel Brodie-Smith of the Association of Investment Companies (AIC), which compiled the list, says: ‘They’ve also seen off the stagflation of the 1970s, the early 1990s recession and the Asian crisis.’

Carthew argues that none of these trusts will wish to break this record. He highlights the City of London Investment Trust which has been paying dividends consistently since 1968…

Also making an appearance in this league are two of Carthew’s other favourites: The Merchants Trust and Diverse Income, which, as its name suggests, tries to invest as widely as possible.

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