Income investors that bought investment trusts to weather the worst of the pandemic cuts suffered a drop in payouts in the first half of 2021, according to the latest Link Investment Trust Dividend Snapshot.
The report, which studies equity investment trusts only, showed that between January and June, dividends paid by investment companies dropped 3.1%, to £891.9m, £29m less than the first six months of 2020. It was the first time in more than a decade that investment trust payouts fell.
Three in 10 trusts made a cut in the first half of 2021, reducing their payout by roughly a quarter (23%). The biggest impact was from the IT UK Equity Income sector, which contributes a quarter of all dividends from investment trusts.
On average, first-half payouts from the sector were down 9% in the sector compared to the previous year. This was despite dividends from the UK stock market rising 8% thanks to a 50% jump in the second quarter of 2021 on the previous year.
It was the first decline since the second half of 2010, when the dividend cuts following global financial crisis filtered through to investment companies.
The fall was a result of pandemic-related cuts filtering through. Investment trusts pay the income that they have received from their underlying holdings, so can be several months behind any changes to their stocks.
Last year, many UK stocks were forced to suspend, cut or cancel their dividend payments in an effort to retain cash to survive the pandemic and issues created by the ensuing lockdowns.
Investment trusts also fared better than their open-ended counterparts, as they had been able to create ‘revenue reserves’ – extra cash from dividends of previous years that they have hoarded for future difficult years.
Pre-pandemic, investment trusts had combined revenue reserves of £2.1bn, but by the end of the first half of 2021 this had fallen to less than £1.8bn. It meant that £22 in every £100 paid out by investment companies over the past 12 months came from reserves.
Over the full 18 months from January 2020 to June 2021, investment trust payouts have risen 2%, compared with a 34.6% decline for UK stock market dividends.
Ian Stokes, managing director at Link Group, said: “Investment trust dividends cannot defy gravity, but they do come with a very plump cushion. Not only do they keep cash in reserve, but they can also bank some of the big capital gains they have made over the last year and hand these out to shareholders too.
“It is one of the most reassuring features of investment trusts that they can smooth out the peaks and troughs in dividend income caused by the economic cycle or big one-off shocks. For investors, this regular, predictable income is very welcome indeed.”
Outside of the UK there was a 10% dividend decline for trusts in the IT Global sector, while regional sectors focused on Asia, Japan and North America broadly paid out more in dividends in the first half of 2021 than last year’s opening six months.
For the year, Link Group said dividends from investment trusts would be around £1.8bn, a decline of 3.2% year-on-year, but added that this was “not something to worry about”.
Source: Link Investment Trust Dividend Snapshot
It expected global funds continue paying dividends “without too much difficulty” as revenue reserves “comfortably exceed” dividend payments and there is “not long to wait” until cash distributed from the underlying companies in funds tops pre-pandemic highs. According to the Janus Henderson Global Dividend Monitor, this should take place in 2022.
For UK trusts, the picture was more difficult and investors should expect lower dividends to wash through for another few months, the report said.
“We would caution that significant growth is unlikely until the wider stock market has caught up a bit on the ground lost in 2020,” it added.