Investment trust dividends rise to record £5.5bn

Investment trust dividends rose 15.4% to a record £5.5 billion in the 12 months to the end of March 2022, according to the latest Investment Trust Dividend Monitor from Link Group.

Trusts that invest only in listed equities held payouts steady at £1.85 billion.

These trusts distribute the dividends they receive from companies listed on stock exchanges in the UK and around the world — so they were impacted by the cut in global company payouts.

The report said dividend growth in the last year came from alternative investments, not traditional equities.

The increase in payouts was driven by those trusts that invest in “alternative” assets, whose payouts collectively rose 25.1% to £3.65 billion.

The biggest increase came from venture capital trusts (VCTs).

VCTs handed out £556 million between April 2021 and March 2022, up 65.7%, while renewable energy infrastructure funds paid their shareholders £583 million, up 38.3%.

“Along with property, the largest dividend-paying sector in the alternatives segment, these categories accounted for four fifths of the overall increase in dividends from all kinds of investment trusts in the twelve months to the end of March 2022,” said the report.

“In 2010, alternative categories of investment trusts contributed less than a third of the dividends paid by the sector overall.

“In 2021 they contributed two thirds. Their payouts were ten times larger in 2021 than in 2010.”

Ian Stokes, managing director, Link Group Corporate Markets UK and Europe said: “10 years ago, alternatives were a much smaller segment of the investment trust market, but they have rapidly expanded as new investment opportunities have opened up in response to investor demand.

“Given that many of the assets in alternatives trusts are relatively illiquid, they are very well suited to the closed-ended structure.

“VCTs have proved very popular with investors in recent years who have been attracted by the generous tax breaks.

“A reduction in the lifetime allowance on pension funds is catching more and more savers with punitive tax on their pension pots.

“The measure has deterred pension saving among wealthier individuals who have looked elsewhere for tax-efficient options for their capital.

“With a 30% tax credit on capital subscribed in a VCT share issue and all income and capital gains tax free, VCTs are the first port of call for many investors now. VCTs have been very big issuers of shares in recent years as a result …

“Investment trusts are an interesting proposition for investors. First, they are able to invest almost anywhere in the world.

“Secondly, they can invest in different asset classes beyond just listed equities, enabling access to hard-to-reach opportunities like private equity or venture capital.

“Thirdly they are able to borrow modestly, using debt to buy more underlying assets, thereby enhancing returns to shareholders over the long term (this is known as gearing).

“And finally, many of them have reserves that they can draw on in bad times to cushion their shareholders when dividends from the companies they invest in go down.”