Since a change to the tax rules in 2012, the vast majority of UK investment trusts pay dividends out of the income they receive from their own portfolio but a number of investment trusts are paying dividends from capital profits, according to a report by the Association of Investment Companies (AIC).
The association has introduced enhanced dividend information for each member company on its website to help investors understand whether an investment company’s dividend is paid from income or capital profits.
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AIC chief executive Ian Sayers said: “Paying dividends from capital profits is an additional income advantage of investment companies. It helps meet shareholder demand for income in this low interest rate environment and potentially can lead to investment companies being rerated to trade on lower discounts, another benefit for shareholders. Clearly investment company boards have an important role to play overseeing any change in dividend policy and ensuring it is in shareholders’ best interests.
“We are now publishing enhanced dividend information on our website to help investors in their decision making. It’s clear that the demand for income remains strong and we want to provide as much data as possible to help investors research investment companies that will meet their income needs.”
Sam Cosh, manager of European Assets Trust, said: “European Assets is unique amongst investment companies in that it is a Dutch domiciled company but has a London listing. Until quite recently the Dutch tax rules differed from the UK rules in that all “reserves” are available for distribution to shareholders in the form of a dividend. Back in 2001, the board of European Assets adopted a “high distribution” policy and provided shareholders with an income calculated as a percentage of the year end net asset value. For the past seven years or so this has been at a rate of 6% per annum.
“Interest rates have been at historic lows for many years and have been falling for the best part of three decades, and bond yields have tumbled as a result. Investors have been seeking income from other assets for some time now. European Assets invests in smaller companies across Europe and these companies do not tend to be high dividend payers because they are growth businesses so tend not to find their way in to income seekers’ portfolios. The structure of European Assets allows the board to pay dividends from capital and by holding the trust, an income investor can diversify their own portfolio into an area that is typically not income producing.”
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By GlobalDataSecurities Trust of Scotland chairman Rachel Beagles said: “In July 2015 the board agreed that it was comfortable using its authority to enhance the annual dividend by distributing some capital profit by way of dividend, as necessary.
“In an unusual step, the board also announced the minimum total annual dividend for the financial year ahead to March 2016 – which was an 18.4% increase on the previous year, and a progressive policy thereafter.
“This offered our shareholders both an attractive yield, underwritten by retained revenue and capital reserves, and a level of income certainty that was prized during a time of market volatility and enduring low yields.
“In adopting this approach, the portfolio manager retains full flexibility and control over stock picking without sacrificing high quality companies poised to deliver a high total return over the long term in favour of yield.
“Earlier this year the board declared a fourth dividend of 1.6p, bringing the total dividend for the financial year ending 31 March 2017 to 5.95p a rise of 2.6% on the prior year. Just 0.21p per share was paid from retained revenue reserves.
“If necessary, going forward, the board will fund a portion of the dividend using capital reserves; the fact that the option is available within the investment trust structure offers a tangible benefit to our shareholders.”
