Sometimes we make life more complicated than it has to be, says Nick Britton, head of training at the AIC.

The basic human need for sustainable income in retirement has spawned countless products, solutions, tools and theories, from annuities to multi-asset portfolios.

We are often told that 4% represents a safe withdrawal rate – though this has been challenged.

One solution to this intractable problem is staring us right in the face, according to London-based chartered financial planners Master Adviser.

The firm has conducted research into investment trusts going back 50 years. They cover 29 mainstream trusts, including the likes of City of London and JPMorgan Claverhouse in the UK Equity Income sector, and Bankers and Alliance Trust in the Global sector.

These trusts have long records of increasing dividends year after year. City of London, for example, has a 52-year track record of increasing annual dividends – meaning you could have been invested since the Moon landing without ever experiencing a cut or a freeze in your annual payout.

How is this consistency possible? It is a mixture of skill and a certain built-in advantage. Skill, because investment trusts like City of London have had the sense to pick companies that have themselves increased their dividends.

The built-in advantage comes because investment trusts don’t need to pay out all the income they receive every year. They can reserve up to 15% to pay out in a future year.

Given this ability, it is possible for investment trusts to tuck away income when dividends from the market are plentiful. Then, when dividends fall (as they inevitably do from time to time) some of the reserved income can be used as a top-up.

In total, there are 20 investment trusts that have raised dividends for 20 consecutive years or more.

Sometimes we make life more complicated than it has to be, says Nick Britton, head of training at the AIC.

At this point, you may be nodding your head, or shaking it furiously. If you are doing the latter, what objections might you have?

It is true that Master Adviser’s research pre-selects the 29 investment trusts. But if you are looking for a list of investment trusts with long histories of hiking dividends, then such a list is readily available.

There are 20 investment trusts with a dividend-raising record of at least 20 consecutive years: lower the bar to 10 years, and there is another 21 to choose from. You can be sure the boards and managers of these trusts are pretty focused on raising dividends – often it is written into their mandate.

In the words of Murray International’s manager Bruce Stout, they also know that plenty of their investors rely on the dividends to pay the gas bill, which concentrates the mind wonderfully.

Of course, none of this amounts to a guarantee, and the usual caveats that apply to any stock market investing, apply here. Your capital is at risk and income is not guaranteed. But guarantees don’t come cheap – look at annuity rates.

Another potential objection is that you need a reasonably sized pension pot to contemplate this sort of strategy.

That is why Doug Brodie, managing director of Master Adviser, urges investors to get started early and watch the income grow each year, reinvesting it until they need it.

If they reach the fortunate position of being able to retire (or semi-retire) on the income from their investment trust portfolio, they have what Brodie calls a ‘bombproof’ income stream. They also have the luxury of choice.

When it comes to their capital, they can save it, spend it (accepting the loss of income) or pass it on. That sounds like an excellent position to be in.

Four dividend heroes

City of London

Run by Job Curtis at Janus Henderson Investors, City of London has paid a rising annual dividend for 52 years in a row. It yields 4.2% and has gearing of 11%.

JPMorgan Claverhouse

Claverhouse’s portfolio is dominated by UK large caps. Run by William Meadon and Callum Abbot, the IT yields 3.4% and has increased annual dividends for 45 years.

Bankers

This global IT brings together seven different portfolios managed by regional specialists at Janus Henderson and is overseen by Alex Crooke. Bankers yields 2.1% and has a 51-year record of raising dividends.

Alliance Trust

Following an overhaul last year, Alliance Trust is managed by pensions consultant Willis Towers Watson. Eight underlying equity managers are tasked with executing a high-conviction strategy to create a portfolio of around 200 ‘best ideas’.

This is reproduced from Investment Week; all views are from the publication. This originally appeared online on 26 September 2018.

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Further reading on this topic:

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