How growing investment firm income can help hedge against inflation

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Inflation is a new and growing concern for many investors. Indeed, one fund manager calls him “the silent assassin of wealth”.

While short-term trends shouldn’t prompt retail investors to take drastic action, there is nothing wrong with ensuring that a portfolio has some protection against inflation.

As discussed in more detail here, dividends can provide some of this protection. Although they are obviously never guaranteed, the security is even greater when an investment generates income.

Dividends can be reduced or eliminated, but they are always a more predictable part of the total return than the element of capital appreciation.

The City of London is home to some of the oldest investment firms in the world, including one called the City of London Investment Trust. Investment trusts are funds that are publicly traded.

For example, if the return “supports” or even surpasses inflation, then the expected capital accumulation is quite a real gain. This is where the long-term dividend growth offered by some of Britain’s most venerable investment trusts comes into its own.

In its latest list of “dividend heroes” (those investment trusts that have increased their dividends for 20 years or more), the Association of Investment Companies notes that 17 out of 18 have beaten inflation by increasing. their payments over the past five years.

And among the next generation of dividend heroes (the trusts that have increased payouts for 10 to 20 years), the figure is 22 out of 24.

AIC Director of Communications Annabel Brodie-Smith said that “the ability of investment firms to withhold up to 15% of their income each year in a revenue pool gives them a huge advantage in providing to investors anti-inflation income “.

“This means that they often have dividends to draw upon in years when income would otherwise have been insufficient, which investors were grateful for during last year’s pandemic,” she adds.

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The 18 investment companies that have increased their dividends for 20 consecutive years or more.

Twenty-four investment funds have increased dividend payouts for less than 20 years but more than 10. One is Murray International, which is currently reporting 4.5 percent.

His manager Bruce Stout calls inflation the “silent murderer of wealth”.

“While sharp declines in the stock markets and violent episodes of evaporating investor confidence may grab headlines and be recognized as instant perpetrators of capital losses, the covert degradation of purchasing power through prices growing faster than income seldom attracts much attention, ”he says.

“And why should he?” For the current generation of investments high on debt, deflation and digital disruption, inflation arguably remains an alien concept.

“Yet… global inflation looks very much alive. As the world emerges from the global Covid pandemic, the inability of global supply chains to cope with extraordinary pent-up demand has once again fanned the flames of inflation.

The 24 investment companies that have increased their payments for more than 10 years but less than 20 years.

The 24 investment companies that have increased their payments for more than 10 years but less than 20 years.

“Trusts that are truly globally diversified, focused on the sustainable growth of income from the underlying investment portfolio, provide an increasingly attractive option in such circumstances. “

The dividend heroes with the highest returns are Value and Indexed Property Income and Aberdeen Standard Equity Income, with 5.7% and 5.6% respectively.

However, care should always be taken to judge only on return because, like with individual stocks, the return on a trust can be inflated by a decline in the stock price.

Meanwhile, two trusts that have increased their payouts in the most impressive way over the past five years are BMO Global Smaller Companies and Scottish Investment Trust, which have annualized dividend growth rates of 12% and 13.2%. .

IS IT TIME TO SUPPORT EQUITY INCOME?

Equity income funds provide a similar service to income-oriented investment trusts, but have fallen out of favor in recent years. But with dividends returning, they could also be a defense against rising inflation.

>> Read more here

This will help keep inflation under control, although past performance is still not guaranteed.

City of London IT is one of four veteran dividend heroes who have increased payouts for 54 years. He’s a regular at analyst recommendations – and the 2.3% premium on his share price indicates he’s currently held in high regard.

Fans of growth-oriented vehicles, however, might be disappointed with the 30% five-year total share price return, no matter how respectable.

Job Curtis, who manages the City of London, said his trust was able to increase its 2020 dividend by 2.2%, “partly funded by income reserves”.

“This was the 8th year out of 29 that the City of London was drawing income reserves; over the other 21 years, the income reserve was increased, ”he says.

“In general, however, the outlook for dividends is improving given the reopening of the UK and overseas economies and strong economic growth.”

The JPMorgan Claverhouse IT has a record 48 years of dividend increase, a yield of 4.2% and can boast a five-year total share price return of 63.6%.

Its manager Will Meadon concludes, “COVID-19 was the ultimate stress test, and many of these investment trusts with high dividend reserves have taken off. “

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