FEATURE between maximising their income today and growing dividends in the future and there is no right or wrong answer when selecting a fund, trust or stock for income. A 70 year-old retiree wouldn’t be well served by a strategy that delivers higher levels of annual income at a timescale beyond their life expectancy. Conversely, a younger investor seeking to build up a pool of income generating assets to fund a future retirement might choose to forego present income with a view to enhancing future income streams. High dividend paying stocks are often wellestablished businesses that generate lots of distributable free cash, yet are mature with limited growth prospects. Dividend growth companies on the other hand tend to pay lower yields as they reinvest part of their cash flows to generate future growth, though dividends of smaller companies are, in general, more volatile but they enjoy higher cover. GRAPPLING WITH THE DILEMMA ‘It is a dilemma that we grapple with day in, day out,’ says Matthew Bennison, UK Equity Fund Manager at Schroders. ‘The approach that we take in the Schroder Income Growth Fund (SCF) and Schroder UK Alpha Income (B7F32Y0) fund is a “barbell” approach, very much designed to balance our requirement for yield today versus growth tomorrow.’ Bennison explains that ‘if you focus too much on the former, you can crowd into companies that are perhaps overdistributing or don’t have high enough growth prospects and you are unlikely to beat inflation with the growth in the income in the medium term. ‘Focus too much on the latter and you are less likely to be able to satisfy your income requirements today. If you just have a portfolio of low yielding high growth companies, the absolute yield might only be 1.5%-2% of the portfolio and that is probably unlikely to satisfy the requirements of an investor that is probably looking for 4%.’ With these aforementioned funds, Schroders ‘blends the two aspects together’ to give a premium yield to the market with dividend growth ahead of inflation. Large high yielders at the value end of the spectrum provide the yield today, while the ‘more exciting, more innovative, more growthy companies that have strong franchises and cash
generative models’ deliver the dividend growth of tomorrow.
TRUST OPPORTUNITIES In a recent piece of research John Dowie, analyst at investment trust researcher Kepler, pointed out it is important for investors to ‘make careful consideration of whether a trust is tilted towards generating a high yield as soon as possible or is orientated towards dividend growth when selecting an investment, in order to make sure it suits their needs and time horizons.’ Fortunately, the investment trust space has a mixture of approaches that should meet most requirements. Dowie drew attention to Troy Asset Management, which has committed to dividend growth in both Securities Trust of Scotland (STS), the global equity income trust Troy took over management of in late 2020, and in UK equity income trust Troy Income and Growth (TIGT). Troy has rebased the dividends for both to allow for more robust and sustainable future dividend growth, reflecting its view that the current dividend/dividend growth dilemma will become exacerbated over time due to the diminishing quality and growth prospects of today’s large, incumbent, old economy dividend payers. Speaking to Shares about Securities Trust of Scotland, manager James Harries explained: ‘We are trying to build an optimum balance of quality, 24 March 2022 | SHARES |
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