Barclays and BP’s dividend hikes good news for trust investors

Aberdeen Asset Managers (Aberdeen) believes recently announced increases in the dividends paid by some UK companies will benefit investment trust investors this year and over the long term.

Last week Barclays announced a 10% rise in its dividend, while recently BP and National Grid have also raised their dividends by 35% and 15% respectively.

With uncertainty surrounding the course of the UK and global economies this year and next, investors in UK equity income investment trusts with their typically traditional large cap holdings, will find dividend increases particularly rewarding.

Unlike their open-ended fund peers, investment trust companies do not have to distribute all the income from the dividends they receive each year. Instead they are able to hold some of this money back in their revenue reserves for subsequent years, when dividend payments from companies may not be as strong. As a result, they can smooth their annual dividends to shareholders, thus reducing the volatility in the level of income investors receive year-on-year.

Using this approach, two UK equity-income investment trusts managed by Aberdeen have been able to increase their total dividends for well over a decade. Murray Income Trust PLC’ annual dividend payments have risen every year for the last 25 years and Dunedin Income Growth Investment Trust PLC’ dividends have grown in each of the last 15 years. Today, both investment trust companies enjoy substantial revenue reserves.

William Hemmings, Head of Investment Companies at Aberdeen, says: “A compelling characteristic of investment trusts is their ability to build revenue reserves which can mean reduced income volatility, despite the ups and downs of capital performance in any particular year. The long-established investment trusts that we manage in this area also enjoy lower total expense ratios than many open-ended funds in the same space and so may appeal to investor looking to select their ISA before the tax year end.”

Commenting on the outlook for UK equities: Charles Luke, co-manager of Murray Income Trust PLC, comments: “UK equity markets have been challenging for investors since the beginning of 2008 amid ongoing global credit uncertainty.

Although the operating environment is undoubtedly becoming more difficult, valuations are now looking more reasonable, and with some attractive dividend yields available, the current weakness provides opportunities for investors with a longer term horizon. The ultimate level of subprime losses and the extent to which this will lead to slower economic growth remains opaque, but valuations are already discounting significant earnings and dividend declines – particularly among domestically oriented cyclical sectors. In addition, newsflow from companies has remained broadly resilient, albeit that management continue to signal caution over the outlook.”

Chou Chong, manager of Dunedin Income Growth Investment Trust PLC, adds: “Having underperformed in 2007, traditional high yielding shares are likely to do better this year due to their lower volatility and defensive tendencies. Furthermore, with a weaker outlook for capital growth, dividend yields are set to become a more significant part of the total return equation. In 2008, equity income investors may not see quite the same level of dividend growth that they’ve enjoyed for the last couple of years. But our regular meetings with management and knowledge of companies based on cumulative research continue to support a good long-term outlook for UK companies and dividend growth. We’ll continue to use any further weakness to add to existing holdings, or to introduce new stocks, now that many companies are trading on more attractive valuations and offering significant dividend yields.”