Investment Trust Dividend Snapshot
Insights - What We Think

Investment trust dividends fall for the first time in a decade but have outperformed the wider market by a mile through the pandemic.

• H1 2021 investment trust dividends dipped 3.1%, the first fall since H2 2010
• But they have easily outperformed wider-market pay-outs since the pandemic began – up 2.0% compared to a34.6% fall for UK plc dividends
• UK equity income trusts made the biggest contribution to the fall because they are the largest category, but European-focused trusts saw the largest percentage declines
• Investment trusts have used revenue reserves and capital gains to support pay-outs
• Link Group expects full year investment trust dividends to drop 3.2% to £1.79bn, even as wider dividends continue to recover – investment trust pay-outs lag behind by a few months

Overview

Investment trust dividends fell in the first half of 2021, even as the wider dividend picture from companies in the UK and around the world improved, according to the Link Group half year Investment Trust Dividend Snapshot.

Between January and June 2021, pay-outs fell 3.1% to £891.9m, £29m less than in the first six months of 2020. This was the first decline since the second half of 2010, when dividend cuts that followed the GFC filtered through to investment trusts, but it was compared against a record H1 2020. In the wider UK stock market, by contrast, first-half 2021 dividends (excluding one-off specials) rose by 8.0% thanks to a favourable comparison to the cuts that began in 2020. Investment trust dividends always lag behind the wider market because they are paid from dividends distributed by companies held in the trusts.

The modest H1 decline from investment trusts is, however, barely a blip compared to the broader dividend wipe-out over the course of the pandemic-to-date. The last 18 months illustrate the point.

Between January 2020 and June 2021, Link Group’s index of UK dividends fell by 34.6%[1] on an underlying basis. Global dividends were down 5.9%[2]. If this were replicated across the investment trust sector, Link Group calculates that investment trust pay-outs would have fallen by almost a fifth over the same period. But in fact, Link Group’s index of investment trust dividends rose 2.0%.

Why was the fall so modest in H1 2021?

Link Group’s analysis shows that pre-pandemic, investment trusts had accumulated reserves of £2.13bn from past dividends they have received from companies but which they are permitted to tuck away for a rainy day. By mid-July 2021, the collective revenue reserve had fallen by £360m to £1.77bn, meaning that £22 in every £100 of dividends distributed by investment trusts over the last 12 months has been funded from reserves. More than half of trusts (56%) have dipped into their back pocket in this way.

The Outlook

Link Group expects trust dividends to decline a little further over the next six months as the rebound in the amount of income paid to trusts by the companies held in portfolios will still leave a shortfall compared to pre-pandemic levels. Link Group estimates that trusts will pay £1.79bn in total for 2021, 3.2% lower than in 2020.

H1 2021 – The Detail

Only three trusts in ten made a cut in H1 2021, but among those that did the average reduction was 23%.

The biggest impact came from the UK Equity Income sector, but mainly because it is the largest income-paying sector, contributing a quarter of dividends from equity investment trusts. Pay-outs here fell by 9% year-on-year in the first half of 2021, a drop of £20.3m. A 10% decline in dividends from the Global sector also made a significant impact. The largest percentage decline among the major categories was from mainstream European funds. Regional sectors focused on Asia, Japan and North America almost all paid out more in dividends, reflecting the very limited effect of 2020s cuts among companies in those parts of the world.