Income Investment Trusts - are these the times they (relatively...) shine?

[monabri]

Thanks. You might be interested in the example of (what was) the Standard Life UK smaller companies trust. Having drained its reserves in the past couple of years to maintain dividends, it now says it will be replenishing its reserves, implying that dividends will not grow much, if at all, in the next few years. Its rate of dividend growth has slowed down dramatically too.

Presumably that means that they either do not have realised capital gains to use or are choosing not to use them, but it sounds like a stark reminder that ITs do not all have the ability to keep paying ever increasing dividends from income or capital. Of course a smaller companies trust is probably a special case.

Dod

Not much of a dividend in the first place. Income seekers would be looking elsewhere with a current yield sub 1.5%. I think a discussion on reserves/ability to grow dividends would be more appropriate for ITs such as CTY, MUT, EDIN .

https://www.theaic.co.uk/companydata/0P ... /dividends

The dividend from AUSC has currently flat lined.

Year end annual dividend
30/06/2021 7.70p
30/06/2020 7.70p
30/06/2019 7.70p
30/06/2018 7.00p
30/06/2017 6.70p

[ADrunkenMarcus]

Thanks. You might be interested in the example of (what was) the Standard Life UK smaller companies trust. Having drained its reserves in the past couple of years to maintain dividends, it now says it will be replenishing its reserves, implying that dividends will not grow much, if at all, in the next few years. Its rate of dividend growth has slowed down dramatically too.

Blackrock Smaller Companies represents a welcome contrast. The dividend continues to grow.

Best wishes

Mark

[TUK020]

Coming to this debate late, I think the OP is right. Looking at my portfolio, the various growth ITs like Scottish Mortgage and Edinburgh Worldwide (and a few others) have suffered big (and sometimes huge) falls in their share prices in the past 6-12 months. Meanwhile other income-focused ITs, which I ditched a few years ago because their total returns were dreadful, have had a decent year with positive total returns in double figures : City of London, Merchants, Henderson International Income and even that perennial sluggard Murray International. Thankfully investing in private equity trusts in the past two years has proved a very good idea, with excellent returns from HG Capital in particular.

I should probably clarify that I initially raised this thread topic as a discussion and potential comparison of income-strategy investments really, where I wanted to consider whether the underlying benefits of the 'cash-reserves' that income-IT's are capable of using during periods of broad market stress might allow income-investors who use those types if income-IT's to benefit and see less disruption in their underlying investment income, when compared to income-investors who choose to hold 'single-share' (HYP) income-producing investments, rather than income-related IT's.

With that original premise in mind, and given that over two years has now passed since I started this thread, I think one of the best ways that might look to answer that original question on top of looking at the IT-income tables that can be seen earlier in this thread, might also be to take a look at Arb's multi-income-portfolio chart, where he tracks long-term income from both his 'ArbIT' portfolio of income-IT's (pink line on the chart below), and his 'ArbHYP' portfolio of single-share income-investments (dark line on the chart below) -

April 2022 chart showing Arb's long-term income-portfolio comparisons -



Source thread for above chart- https://www.lemonfool.co.uk/viewtopic.php?f=31&t=34027&p=492795#p492737

The large COVID-related dip in income produced by the HYP single-share investments is clear to see on the above chart, and it's also clear to see that the income-IT-based portfolio has shown much more resilience in terms of continuing to deliver income over the recent COVID-related market turbulence.

Recently, we can also see that the income from the single-share ArbHYP portfolio is recovering strongly, although it's yet to reach either the scale or trajectory of the original pre-COVID period, whilst we can see that the ArbIT-based portfolio has taken a bit of a rest in recent quarters, which might be expected when we consider that income-IT managers will be looking to balance continuing payouts with a desire to nurture 'cash reserve' balances that are likely to have taken quite a hit over recent years due to being used in maintaining steadier income-delivery stream over that earlier period.

I hope the above explains the broad original intention of this thread, but I would add that your point regarding growth-investments is a good one, and I do note with some interest that there does seem to be a complete absence of what used to be really quite regular 'Total-return vs income investment' arguments on this forum over recent months...

Cheers,

Itsallaguess

That RPI line has done well, and very steadily. Which portfolio is that?

[88V8]

...I do note with some interest that there does seem to be a complete absence of what used to be really quite regular 'Total-return vs income investment' arguments on this forum over recent months...

The notion that one can develop a reliable income by periodically selling one's gains, that notion took root and indeed may have been valid during the long bull-run of past years.
But now the bull run is over and reliable gains are thin on the ground, the notion has become a fallacy.
So its protagonists have less to say.

Mind you, there were some good points made:
- use your CGT allowance
- unneeded income creates an unnecessary tax event
- high yielders may damage your SP
- the combination of taxed high yield and falling SP (eg HFEL) can be unhelpful.

I have my buying boots on this morning, and I may top up some ITs. But not HFEL.

V8

[Charlottesquare]

...I do note with some interest that there does seem to be a complete absence of what used to be really quite regular 'Total-return vs income investment' arguments on this forum over recent months...

The notion that one can develop a reliable income by periodically selling one's gains, that notion took root and indeed may have been valid during the long bull-run of past years.
But now the bull run is over and reliable gains are thin on the ground, the notion has become a fallacy.
So its protagonists have less to say.

Mind you, there were some good points made:
- use your CGT allowance
- unneeded income creates an unnecessary tax event
- high yielders may damage your SP
- the combination of taxed high yield and falling SP (eg HFEL) can be unhelpful.

I have my buying boots on this morning, and I may top up some ITs. But not HFEL.

V8

Of course selling gains may end up somewhat kiling the goose that lays the golden egg leaving one with the laggards which never get sold.

I actually try ( I am not great at it) to punish the underperformers, it has taken years for me to get to this position (the psychology of selling firming what was previously mere notional loss) . So if I buy something and after say three years it has not given me a circa 6% pa TR there is a tendency for me to maybe not eliminate it but at least prune the holding and place the funds elsewhere.(Presuming I have spotted something else I want, absent that I tend not to sell)

[dealtn]

...I do note with some interest that there does seem to be a complete absence of what used to be really quite regular 'Total-return vs income investment' arguments on this forum over recent months...

The notion that one can develop a reliable income by periodically selling one's gains, that notion took root and indeed may have been valid during the long bull-run of past years.
But now the bull run is over and reliable gains are thin on the ground, the notion has become a fallacy.
So its protagonists have less to say.


V8

Might I suggest you are displaying either a misunderstanding of what Total Return, or fallacy, actually means in that case.

As no doubt are others that choose to judge a contest between total return vs income investment when they perhaps are conflating it with growth vs income as alternative strategies.

[88V8]

...I do note with some interest that there does seem to be a complete absence of what used to be really quite regular 'Total-return vs income investment' arguments on this forum over recent months...

The notion that one can develop a reliable income by periodically selling one's gains, that notion took root and indeed may have been valid during the long bull-run of past years.
But now the bull run is over and reliable gains are thin on the ground, the notion has become a fallacy.

Might I suggest you are displaying either a misunderstanding of what Total Return, or fallacy, actually means in that case.

As no doubt are others that choose to judge a contest between total return vs income investment when they perhaps are conflating it with growth vs income as alternative strategies.

TR in terms of realising capital as a proxy for income, requires growth, otherwise one is cooking the golden goose.
I don't regard it as a con, just unreliable, and I think its merits have sometimes been inflated.

V8

[funduffer]

We live in times of high inflation. I suspect we will continue to see increases in dividends from income-producing ITs, but not ones that match or exceed inflation. Thus they will be able to build reserves whilst still maintaining headline growth in dividends (to keep themselves on the dividend aristocrats list!). I have seen this already in some of my ITs, with miniscule dividend increases at a time when inflation is raging at around 10%.

My own experience has been similar to arb's - my HYP income suffered a huge reduction during the pandemic (-46% income per unit in 2020-21), and the ITs much less (-12% income per unit in 2020-21).

Interestingly the IT portfolio income (per unit) has also bounced back quicker in 2021-22, now exceeding 2019-20 tax year's value, whereas the HYP's still languishes.

Useful thread, and the next few years will be interesting I am sure.

FD

[dealtn]

...I do note with some interest that there does seem to be a complete absence of what used to be really quite regular 'Total-return vs income investment' arguments on this forum over recent months...

The notion that one can develop a reliable income by periodically selling one's gains, that notion took root and indeed may have been valid during the long bull-run of past years.
But now the bull run is over and reliable gains are thin on the ground, the notion has become a fallacy.

Might I suggest you are displaying either a misunderstanding of what Total Return, or fallacy, actually means in that case.

As no doubt are others that choose to judge a contest between total return vs income investment when they perhaps are conflating it with growth vs income as alternative strategies.

TR in terms of realising capital as a proxy for income, requires growth, otherwise one is cooking the golden goose.
I don't regard it as a con, just unreliable, and I think its merits have sometimes been inflated.

V8

Which is what directors of companies do each time they declare and pay a dividend. Total Return is a calculation metric, not an investment strategy.

If you wish to decry those that sell shares to raise "income" in addition to dividend "income" as an (unnecessary) additional risk, that may have merit. But that isn't about Total Return but something else.

To be consistent what are your thoughts on Directors declaring dividend income and owners reinvesting such as capital? The other side of the same coin. An (unnecessary) round trip.

Are Directors able to perfectly match the "income" requirements of their investors? I can't see how that is possible, so what is wrong with investors adjusting their portfolios through buying and selling to adjust their returns from their investments, or "income" as you appear to define it, to better match their requirements?

No surprise you only choose to focus on the subset where capital is sold to raise additional "income" and not any other, and typical of many investment practioners in the world of investment.

[NotSure]

TR in terms of realising capital as a proxy for income, requires growth, otherwise one is cooking the golden goose.
I don't regard it as a con, just unreliable, and I think its merits have sometimes been inflated.

V8

The ability to sustain dividends surely requires growth?

If one share drops by 10% while paying a 5% dividend, while another rises 10% and I pull out 5% for income, how have I retained my capital (the golden goose) in the former case, yet not in the latter?

Not trying to be confrontational, just a genuine newbie question?

[88V8]

TR in terms of realising capital as a proxy for income, requires growth, otherwise one is cooking the golden goose.

The ability to sustain dividends surely requires growth?

If one share drops by 10% while paying a 5% dividend, while another rises 10% and I pull out 5% for income, how have I retained my capital (the golden goose) in the former case, yet not in the latter?

Growth? Not necessarily. As dealtn comments, it depends how the Directors choose to steer the ship.
Take DEC for instance (Diversified Energy) where the SP pretty much stands still but the yield remains nigh on 9% and things are likely to stay that way.

And in terms of ITs, HFEL Henderson Far East returns >7% even though the SP has drifted off in recent years.

Your examples.... your capital in terms of the number of shares remains unless you crystallise a loss by selling. And you have the income. Even though the SP has fallen you have the income.
But if you sell 5%, you have reduced the number of shares by 5% and future dividends if any will be reduced accordingly.

And my viewpoint is that while dividends do not depend on growth, being able to use capital as an income proxy, does so depend.

V8

[CliffEdge]

If you don't sell, there is no crystallized income, or growth, it's all potential. This is the challenge.

[mickeypops]

I run an income focussed portfolio of 20 diversified Investment Trusts that help support our retirement. It was completed shortly after we retired mid 2018 and I’ve been pleased to note that the income has held up through the challenging times we’ve seen since. The last annual review was posted here…

viewtopic.php?f=56&t=30591

The next review will be due at the end of July, but I expect a similar report.