Invest in trusts beating rivals for 40 years

By Stephen Womack
Updated: 05:12 EDT, 4 April 2011

Savers who want a growing income from their money should give serious consideration to top-ranked investment trusts.

Dividend flow: Malcolm Roxburgh at he AIC roadshow at Old Trafford.

No fewer than 16 trusts have a 20-year record of consistently increasing the annual dividend they pay to investors.

And seven have increased income for more than 40 years, according to the latest analysis from trade body, the Association of Investment Companies (AIC).

The 'Magnificent Seven' are City of London (44 years of successive dividend growth); Alliance Trust; Bankers Trust; Caledonia Investments (all 43); Albany (41); and F&C Global Smaller Companies; and F&C Investment Trust (both 40).

Investment trusts are companies quoted on the stock market. They are allowed to retain up to 15% of the income they receive each year from underlying investments and hoard this as a revenue reserve. This can then be used to support dividends in years when markets struggle.

Unit trusts, on the other hand, must pay out all their income in the year they earn it. This means payouts will be higher in the good times, but more erratic.

Ben Willis of Whitechurch Securities in Bristol says: 'This sort of dividend record is impressive for income investors who want consistent and steady growth.

'Many trusts have been raiding their reserves to maintain dividends over the past two years. But it is important investors take account of the starting level of income.

'Many of these investment trusts will be paying less on day one than comparable unit trusts, albeit with good growth prospects over time.'

Malcolm Roxburgh, 56, from Ormskirk, Lancashire, is one investor enjoying a growing flow of dividends from his investment trusts.

His holdings include Murray International, run by Aberdeen Asset Management, which has increased its dividend by more than 80% over the past five years. The dividend has risen from 19p a share in 2006 to 34.5p last year.

And shareholders in the trust, which invests in companies across the world, have seen the value of their capital increase by 57% over the past five years.

Malcolm was one of more than 200 investors from the North-West who attended a recent investment trust roadshow at the Old Trafford cricket ground in Manchester.

The free event, organised by the AIC, gives savers the chance to meet investment managers and boost their knowledge of world markets.

Malcolm, who was forced to retire from his job in local government because of ill health, says: 'I came to one of these roadshows a few years ago and picked up a couple of investment tips that did nicely for me, including Murray International. I'm wondering what to do with my next Isa, so this sort of event really helps with my planning.

'I've a fair bit invested in emerging markets, so I wonder if it might be time to take a more cautious approach.'

The next Association of Investment Companies roadshow will be held in Edinburgh on June 7. For more details, go to theaic.co.uk.

›› Tables: Investment trust performance and analysis

But beware trying to buy below market value trusts

Trying to buy investment trusts 'on the cheap' can be a false economy.

They usually have a fixed number of shares in issue, which means if demand for a fund is weak, shares can sometimes trade at a big discount to net asset value - the underlying worth of the investments.

Stockbroker Charles Stanley analysed whether savers could profit from 'discount trading'. It checked how well trusts did after periods when discounts were highest, so shares were cheap and discounts low.

At first sight, it appears there could be lucrative opportunities. Average returns on Foreign & Colonial, for example, were 18.9% in the year after its shares were cheapest, but minus 2.9% in the year after shares were expensive.

But in most cases investors who bought shares on the cheap fared less well over the next five years than those who invested when discounts were low.

Analyst Stephen Peters says: 'Trusts may be trading at a discount for a wide number of reasons.'