Understanding Investment Trusts: Unraveling The Mystery Of Dividend Payments

Investment trusts are listed companies that have the ability to pay dividends. However, not all investment trusts pay dividends—some are purely focused on capital growth. Dividends are payments made by companies to their shareholders, and they can be made monthly, quarterly, semi-annually, or annually. Investment trusts that pay dividends invest in companies or assets that provide an income to them.

Investment trusts can hold back a portion of their income to create a 'revenue reserve'

Investment trusts can hold back a portion of their income to create a revenue reserve. This is a unique feature of investment trusts, as open-ended funds are required to pass on all dividend income received from the companies they invest in. Investment trusts can hold back up to 15% of their income each year, which they can then use to maintain their own dividends in leaner years when company payouts fall. This can be useful for investors who prefer a steady income from their funds.

The revenue reserve is not a sum of money separate from the trust's portfolio, sitting in a bank account for emergencies. It is an accounting entry: the money will be invested alongside the trust's other assets – in stocks, bonds or something else – on which the trust will hopefully be earning income and/or capital gains.

The revenue reserve provides a smoothing effect on dividend payments. In good years, investment trusts hold back some of the income to create a revenue reserve, which they can then draw on when markets are tough, such as during the pandemic when many companies cut and suspended dividends. With careful management, investment trusts can build up long records of consecutive annual dividend increases, with some trusts growing dividends every year for over half a century.

However, tapping into the revenue reserve will typically require the trust to sell some of its investments to pay out the proceeds as dividends. This means that, while the revenue reserve can help to maintain and grow the trust's dividend, it may come at the expense of future dividend income, as the portfolio will shrink by a meaningful amount.

Investment trusts can pay dividends from capital reserves

Investment trusts can also use their 'revenue reserve' for income payments, which is built up from holding back up to 15% of the natural income paid to the trust each year. Keeping money in reserve provides a smoothing effect on dividend payments. In good years, investment trusts hold back some of the income to create a 'revenue reserve'. This reserve is put into action when markets are tough, such as during the pandemic when a swathe of dividend stalwarts shocked investors by cutting and suspending dividends.

The reserve is used to make up any income shortfall from companies the portfolio invests in to ensure investors still receive a steady income. With careful management, investment trusts can build up long records of dividend increases in this way. A few investment trusts have grown dividends every year for over half a century. Many more trusts have achieved consecutive annual rises in their pay-outs for more than 20 years.

Investment trusts are listed companies and have the ability to pay dividends. Not all investment trusts pay dividends, some are purely focused on capital growth. Those investment trusts that do want to pay an income to their shareholders invest in companies or assets that provide an income to them.

Investment trusts can pay dividends annually, quarterly, or monthly

Investment trusts are listed companies that have the ability to pay dividends. Dividends are payments made by companies to their shareholders from their profits. Not all investment trusts pay dividends, as some are purely focused on capital growth. However, those that do want to pay dividends to their shareholders invest in companies or assets that provide an income. Dividends can be paid out of surplus revenue (income less expenses) for the year, revenue reserves, or capital reserves.

Investment trusts can pay dividends annually, semi-annually, quarterly, or monthly. The frequency of dividend payments is decided by the board, with guidance from the fund manager appointed to manage the portfolio. Trust boards typically aim to increase dividends year-on-year and have the flexibility to do so. However, this does not mean that dividends cannot be cut. If a board feels that the dividend is unsustainable, it can decide not to increase or even reduce the payment.

Investment trusts have the ability to hold back up to 15% of their income in a 'revenue reserve'. This provides a smoothing effect on dividend payments, allowing trusts to maintain or increase dividends during bad years. In addition, investment trusts can also pay dividends from capital reserves, which involves converting some of the trust's capital growth into income. However, this comes with the risk of depressing the net asset value (NAV) of the trust as assets must be sold to fund the income.

Investment trusts can pay dividends from surplus revenue

Investment trusts are listed companies and have the ability to pay dividends. They earn income on most of the money they invest. They can receive dividends from companies whose shares they hold and be paid interest on loans to governments and businesses they buy.

Trust boards typically aim to increase dividends year-on-year, but dividends can be cut if they are deemed unsustainable. The frequency of dividend payments is decided by the board with guidance from the fund manager appointed to manage the portfolio. Dividends are usually paid out either monthly, quarterly, semi-annually, or annually.

Investment trusts can pay out all the income they receive each year to investors, but they can also hold back up to 15% of that income in a 'revenue reserve'. This provides a smoothing effect on dividend payments. In good years, investment trusts can hold back some income to create a revenue reserve, which can be used when markets are tough or when investment income falls or flattens out.

The revenue reserve is an accounting measure rather than a physical pot of money sitting in the bank. Therefore, payments made from the revenue reserve can impact the future growth potential of the investment trust.

Investment trusts can manufacture income by selling shares

When investors want to buy into a unit trust or OEIC, the manager creates new units and invests the new money. Likewise, when investors want to sell, the manager may have to sell investments or parts of them to enable the cancellation of units. However, as investment trusts are closed-ended, if you come in as a buyer after a trust's launch, you can only do so if an investor wants to sell their shares.

Investment trusts are also allowed to borrow money to invest in more assets on behalf of their shareholders. This is known as 'gearing'. The money raised from gearing is used to increase the size of the trust's investments. Investment trust managers may want to do this when they see a rise, or potential rise, in a particular sector or stock's share price.

More shares in an investment with a rising value will boost investments, bringing greater potential for both income and growth. However, when share prices are falling, gearing can just as easily exaggerate any losses. So, while this additional risk could deliver better returns, it could also cause greater losses.

Investment trusts can pay out all the income they receive each year to investors. However, they also have the ability to hold back up to 15% of that income in a 'reserve'. This is a unique feature of investment trusts, as open-ended funds are required to pass on all dividend income received from the companies they invest in.

When times are good, investment trusts hold back some of the income to create a 'revenue reserve'. This revenue reserve is then put into action when markets are tough, such as during the pandemic when many companies cut and suspended dividends. The reserve is used to make up any income shortfall from companies the portfolio invests in to ensure investors still receive a steady income.

In summary, investment trusts can manufacture income by selling shares, as they are structured like public limited companies and listed on the stock market. They can also borrow money to invest in more assets, and they have the ability to hold back a portion of their income to create a reserve for tough times.

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