An announcement this morning from Alliance Trust (ATST) says that the board has concluded that an increased dividend “will benefit existing shareholders and enhance the attractiveness of the Company’s shares”. They expect the overall annual dividend to increase by 32.5% over the 2020 dividend. The proposed increase will be well covered by distributable reserves and income it is suggested although no doubt some of the extra dividend cost will come from capital.
ATST had a reported yield of 1.43% last year according to the AIC which is the figure a lot of private investors look at when identifying good investments, when they should be looking at total return and overall performance. So far as the tax position of most private investors are concerned, turning capital growth into dividend income is a mistake as they will end up paying more tax. If they need more cash income they could simply sell some shares.
As with City of London Investment Trust I recently commented upon, and as very evident at their AGM, the emphasis on dividends paid by the trust, and growth in them, is apparently aimed at pleasing investors when investors are being fooled by the cash they see coming in when total return including capital growth is what they should really be paying attention to.
There are some interesting comments on Alliance Trust by Mark Northway in the latest ShareSoc Informer newsletter published today. He points out that the change to a “best ideas” portfolio approach managed by Willis Towers Watson since 2017 has not returned significantly above average performance after costs as anticipated. A huge amount of effort has been put in with little benefit he suggests. But perhaps that just shows how difficult it is to beat index benchmarks consistently particularly when the trust’s portfolio is so diversified. At least the trust’s performance is no worse than its benchmark as used to be the case before the revolution and appointment of a new manager.
As part of my “barbell” portfolio I am happy with the performance of Alliance Trust but I would have preferred them not to increase the dividend. I barely need to the cash as household expenditure is sharply down in the last year due to self-isolation from Covid. I’ll end up reinvesting the dividend cash after paying tax on it, when Alliance could do that for me tax free!
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
Whilst you right that total return is the most important metric when evaluating performance, dividends are important for an investor in my situation. I will explain.
Almost all my investments are in a SIPP or an ISA, so tax on dividends is not an issue. I am reliant on my portfolio for my entire income. The problem with selling shares to raise that income is that you are reliant on the vagaries of the market: if the market slumps, the last thing you want to do is to have to sell shares at poor prices. In the world of investment trusts, it would be unfortunate to have to sell shares at a time when the trust is trading at a significant discount to NAV. A good example was the RIT Capital Partners investment trust (RCP). For several years it was trading at a significant premium to NAV but, since the Covid crisis it has traded at a significant discount (for no good reason, as it has continued to perform well). It’s current NAV is 39% ahead of the end January 2020 level.
Another trust that has performed well (a 33% NAV gain over the same period – excluding dividends) is the JP Morgan Global Growth and Income Trust (JGGI). A few years ago this trust introduced a dividend policy to pay 4% of the trust’s NAV at the end of each financial year as a dividend (split into four quarterly payments) in the following year. Since then the trust has persistently traded at a premium. That, in turn means that it is able to issue shares regularly, at a premium to NAV and thus preserve it’s capital pool – despite paying dividends out of it’s capital account as well as its revenue account. It does not seek to hold shares with high yields but, internally, is focused on maximising total return from its investments. It’s top 10 holdings include the likes of Amazon, Microsoft, Alphabet, Wells Fargo and Mastercard. It also runs a fairly concentrated portfolio, with fewer than 60 holdings in total.
In effect this trust is doing the selling for you – but that means that you don’t end up having to sell your shares in the trust at a discount to NAV to produce your desired income during market downturns.
I guess RCP wouldn’t want to adopt a similar policy, because of the large Rothschild family interest, which would suffer a big tax hit on dividend payouts.