This trust’s reliable dividend growth track record appeals in times of economic uncertainty
“Keep it simple” is arguably the most useful adage in the world of income investing. Indeed, in Questor’s view, a diverse portfolio of dividend-paying stocks offers the simplest route to a generous and growing income over the long run.
However, many income investors have other ideas.
From peer-to-peer lending to property crowdfunding, and from the use of robo-advisers to copying short-term “investors” on trading platforms, there are an almost infinite number of instances where income seekers have overcomplicated the management of their investments.
As a result, they have ended up with a hotchpotch portfolio that ultimately fails to meet their income needs.
Certainly, dividend stocks are imperfect. The stock market has a long history of boom and bust, with its inherent cyclicality producing periods, often extended, when returns thoroughly disappoint.
For instance, the FTSE All-Share index is down by about 1pc over the past year. But over the long run, no other asset class offers a superior risk/reward opportunity for investors who seek a high, rising and reliable income.
For example, the Schroder Income Growth investment trust, which was added to our income portfolio in December 2016, has thus far paid dividends amounting to 30pc of the initial purchase price.
It has also generated a 14pc capital return despite being held during a period of significant turbulence and uncertainty for the world economy.
Over the past decade, the trust has delivered a 6.9pc annualised capital gain. This is 0.8 percentage points greater than the annualised capital return of the FTSE All-Share index over the same period.
As well as achieving its goal of generating capital growth, the company has successfully met its central objective to grow shareholder payouts at a faster pace than inflation. Since 2013, for example, dividends per share have grown by 3.4pc per annum versus an average inflation rate of 2.4pc.
Since inflation is forecast to fall to 3pc in the second quarter of next year, according to the Bank of England, further real-terms dividend growth seems likely over the coming years.
And with a 4.4pc dividend yield alongside 27 years of uninterrupted dividend per share growth, the trust continues to offer significant appeal for income-seeking investors.
It focuses on companies that offer reliable dividends which can grow at a faster pace than inflation, rather than chasing stocks that offer a high initial yield.
It uses a bottom-up approach that seeks to capitalise on market mispricings among high-quality stocks which have solid financial positions, clear competitive advantages and are set to benefit from structural growth opportunities.
Essentially, it uses the fickle nature of investor sentiment to buy temporarily undervalued stocks for the long run.
The company’s portfolio is relatively concentrated. It currently contains just 42 holdings, with its ten largest positions accounting for roughly 46pc of net assets. This is likely to mean that its performance is volatile and could differ materially from the index.
Since this column takes a long-term view and tends to favour managers who are willing to materially deviate from the make-up of their benchmark, the trust’s limited number of holdings is not viewed as a negative.
Major holdings include high-quality companies such as AstraZeneca, Unilever, GSK and Glencore.
Although its positions are comprised exclusively of UK-listed stocks, they are global businesses that depend on the world economy’s performance.
And with the global economy expected to produce a stronger performance as inflation falls, interest rate rises abate and China’s reopening positively impacts global activity levels, the outlook for the trust’s holdings is set to improve.
Since the trust has a gearing ratio of roughly 11pc, it is well placed to benefit from the prospect of better corporate performance and more robust investor sentiment.
Although a discount to net asset value of 0.5pc is very modest compared with the rock-bottom valuations of some investment trusts, a track record of consistent index outperformance means the company offers good value for money.
In Questor’s view, the Schroder Income Growth investment trust remains as appealing now as when it was first added to our income portfolio over six years ago.
Its attractive yield, history of reliable dividend growth and sound strategy mean that it offers a simple, yet highly rewarding, path to a worthwhile income return over the coming years.
Questor says: Hold
Share price at close: 300.5p
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