Reinvesting the dividends from your investments and profiting from the wonder that is compounding most certainly pays, as we demonstrate in a special report on dividend reinvestment published today (16 Mar).
One structurally-advantaged type of fund offering a terrific source of these good and growing shareholder rewards is an investment trust.
These closed-ended funds are able to squirrel away up to 15% of their income every year in a pot called ‘revenue reserves’, which they can dip into if times get tough and the income from their underlying holdings weakens.
DYNAMISM & DIVIDENDS
Among the Association of Investment Companies’ (AIC) nigh-on legendary ‘Dividend Heroes’ is F&C Global Smaller Companies Trust (FCS), which has established an impressive 46-year track record of consecutive dividend increases.
Manager Peter Ewins explains: ‘The bulk of the returns within the trust have historically come from capital growth, although the rising dividends have also played their part in generating shareholder returns over the years.
‘We seek to invest in individual companies which have a growth dynamic within them, rather than in companies which maybe pay a high yield today but where that dividend will be static or go backwards over time.’
He favours companies with a record of good organic cash flow. ‘These companies are likely to be able to finance expansion over time without regular recourse to new share issuance, and, if they are successful in their growth aspirations, they are likely to be able to deliver good dividend growth for their investors.’
RAINY DAY MONEY
In common with dividend hero peers, F&C Global Smaller Companies Trust has built up revenue reserves over the years.
Akin to rainy day money, these reserves can be tapped into in the event that a particular year’s income from the investment portfolio is lower.
Yet as Ewins is keen to point out: ‘Over the last five years, there has been no need to use reserves to support the dividend growth, as income receipts have been very encouraging.
‘There is always the scope to use these reserves should, for example, an economic recession undermines corporate dividend payments.’
STOCKS IN THE PORTFOLIO
Currently, Ewins’ income favourites from the portfolio include Hill & Smith (HILS), which supplies a wide range of infrastructure products and operates as a galvaniser in a number of geographic markets.
‘The company has a strong record on the cash flow front, with galvanising in particular being a good generator of cash, allowing the company to finance both organic and acquisitive growth. Hill and Smith’s dividend has advanced strongly in recent years on the back of this,’ enthuses Ewins.
F&C Global Smaller Companies is also invested in Sirius Real Estate (SRE), UK-listed, yet entirely focused on the German property market.
‘Sirius Real Estate has an attractive dividend payment, stemming from owning high yielding light industrial and office properties in Germany, financed with low cost debt facilities,’ says Ewins.
‘This allows the company to pay out good dividends to its shareholders, provided, as has been the case, they manage occupancy levels well by retaining and growing tenants.
‘As Sirius grows, the number of assets that it owns are also economies of scale in terms of profitability, which again is supportive for dividend progression.’
In the US portfolio, the fund manager has a position in the largest truck broker in North America, being C.H. Robinson (CHRW:NDQ).
‘The company has delivered consistent earnings and dividend growth as its technology platform allows it to become an integral part of the US logistics landscape, with high levels of recurring business and a strengthening competitive position.
‘Recently C.H. Robinson sought to deploy capital internationally to address customers logistic needs on a global basis. This high margin, capital light approach to growth should allow them to sustain high levels of cash returns to shareholders.’