I’ve always considered investment trusts to be among the very best long-term defensive investments. There’s a couple of key reasons.
One is that, unlike handing over money to typical fund managers, there’s no conflict of interest. Fund managers are answerable to their bosses, to the companies they work for. They’re there to maximise the size of the slice taken by the company’s owners. But when they’re working for investment trusts, that’s you, me, the people who stump up the cash. When we invest by buying shares in an investment trust, we become the owners.
The other key thing I like about investment trusts is the way they’re allowed to handle dividends. Cash on the books can be accumulated during good spells and is handed out as extra during tougher years. And experience shows that the top trusts manage their cash flow and their dividends in a conservative and sustainable way.
That helps provide a steady income for investors, which many individual companies fail to do. I despair when I see the number of top UK firms paying out dividends they can’t afford, while shouldering increasing debt, looking only to make the next quarter look good. That’s not sustainable, it’s reckless, and it ultimately fails.
53-year investment trusts
The Association of Investment Companies keeps a list of dividend heroes that have increased their dividends for the longest periods. The 2020 list shows City of London Investment Trust, Bankers Investment Trust, and Alliance Trust at the top. Those three have lifted their dividends for an astonishing 53 years in a row.
In the year those magnificent dividend runs started, Sir Alf Ramsey was knighted for the 1966 World Cup victory, the first North Sea gas was pumped ashore, and Trumpton was first shown on British TV.
Best dividend?
Of those three investment trusts, City of London is down 26% in 2020, below the FTSE 100. But it has just declared a 2020 dividend of 19p per share, up 2.2% on last year. That’s a yield of 5.8%. With the trust’s biggest investments being top dividend-paying companies, and with plenty of cash reserves, I doubt there’s a better income investment out there today.
The other two investment trusts don’t offer the same yields, but their share prices have been holding up well. Shares in Alliance Trust have lost just 4.6% so far this year (while the FTSE 100 is down 18%). And the Bankers share price is actually in positive territory – up only 1%, but that’s a rare feat in 2020.
Half a century
Caledonia Investments has raised its dividend for 52 years in a row (every year since the Ford Escort was introduced). And a whole bunch of investment trusts have increased their dividends every year for 40 years and more.
So, are you looking for safe investments to see you through all the coming crises that will send stock markets crashing through the rest of your working life? I reckon investments trusts like these can form the bedrock of a very dependable portfolio. Then you can just sit back and remember that shares have beaten all other forms of investment for more than a century, through crises far worse than Covid-19.