Income heroes

The most consistent ‘dividend heroes’ can now be named as Caledonia Investments (LSE: CLDN), the Bankers Investment Trust (LSE: BNKR) and JPMorgan Claverhouse Investment Trust (LSE: JCH). These investment trusts have the distinction of raising their dividend by more than inflation every single year — without interruption — for two decades, according to new research from investment platform AJ Bell.

As well as offering consistent dividend growth, Caledonia and Bankers generated a total return of a massive 580.4% and 474.3%, respectively, over the last 20 years, while also increasing dividends by 5.3% and 6.5% a year on average. The beauty of a rising dividend is that it helps you beat the eroding effect of inflation, and give you a steadily growing income in retirement.

I’ve included long-standing investment trusts F&C and Witan in the table below, because they also deserve respect for increasing their dividends by 7.2% and 6% a year, respectively, over the same 20-year period.

Caledonia, which can trace its roots back to 1878, currently has around £2bn under management. It runs a concentrated portfolio of international investments and funds, targeting proven businesses with long-term growth characteristics and the ability to deliver rising income. This is no closet benchmark tracker. Its 10 largest holdings are mostly unfamiliar names to me such as Deep Sea Electronics, Cobehold and Buzz Bingo, although Microsoft was really recognisable at number 10.

As Alan Oscroft recently noted, Caledonia has now increased its dividend for 52 consecutive years, yet it currently trades at a massive discount of 16.3% to net asset value.

Bankers Investment Trust aims to beat the FTSE World Index for capital growth while generating annual dividend growth above the UK retail prices index, again by investing in global listed companies. It’s 30% invested in North American, with slightly less cover in the UK, while the remainder of its £1.17bn portfolio is divided between Europe, Asia-Pacific and Japan.

Mainstream

Here the stock picks are a lot more mainstream, with American Express, Microsoft, Berkshire Hathaway, MasterCard and Visa figuring in its top 10 holdings. The discount isn’t as generous, with just 2.11% to net asset value, but its differing holdings mean it could nicely complement Caledonia in your retirement portfolio.

JP Morgan Claverhouse is a UK equity income fund with a conviction portfolio of between 60 and 80 stocks. It’s also a smaller fund, with £434m under management, and returns are impressive given how the UK has underperformed compared to many global markets. It currently trades at a discount of 4.7% to net asset value.

These three investment trusts could give you all the joys of rising growth and income, with none of the trouble of dealing with buy-to-let tenants.

Their closed-ended structure means an investment trust’s performance is unaffected by asset flows, enabling it to invest in some illiquid asset classes and emboldening management to take a longer-term view. As such, investment trusts have often performed better compared to unit trusts and other collective, or pooled, investments.

And when it comes to finding reliable, steadily growing streams of income, the investment trust sector has a long and proud history of dividend growth. This is helped by the fact that investment trusts can hold back some of the dividend income they earn, allowing them to supplement dividend payments to shareholders in leaner years — something unit trusts and other open-ended funds cannot do. As a result, there are now more than 20 funds that have increased their dividends for 20 or more consecutive years, according to data from the AIC.

UK equity income

JPMorgan Claverhouse Investment Trust (LSE: JCH) is one such fund, with 44 years of consecutive dividend increases under its belt. It aims to provide a combination of capital and income growth from a portfolio consisting mostly of UK stocks.

The company aims to hold between 60 and 80 individual equities in which the fund manager has high conviction, with the flexibility to invest across the breadth of the UK equity market. Large-caps such as Royal Dutch Shell (7.5%), HSBC (6.6%) and British American Tobacco (5.3%) dominate its top 10 holdings, but its portfolio is noticeably overweight on mid-caps Electrocomponents (2%), Synthomer (1.9%) and Fevertree Drinks (1.7%).

Sector-wise, the trust has the largest exposure to financials (28.5%), consumer goods (17.6%) and industrials (13.3%).

Dividends are paid quarterly, with the total paid last year amounting to 24.5p, giving its shares a healthy yield of 3.4%. Fees are reasonable too, with ongoing charges estimated to total 0.76% over the past year.

Global diversification

Another investment trust worth a closer look is The Scottish American Investment Company (LSE: SCAM). With 37 years of consecutive annual increase in shareholder payouts, this fund has a slightly shorter track record of income growth; however I reckon this is made up for by its superior recent performance and its more diversified investment strategy.

Although the focus of its portfolio is on global equities, the company also owns fixed-interest and direct property investments, which represent 5.8% and 13.8% of its portfolio value, respectively. European equities represent its single biggest weighting, accounting for 35.3% of its portfolio, and this is followed by North American stocks, which account for a further 23.6%.

Historic performance figures for the past three years are encouraging as shares in the fund delivered a total return of 64%, significantly beating Claverhouse’s performance of just 32%.

On the downside, shares in The Scottish American Investment Company trade at a slight premium to its net asset value of 7%, against Claverhouse’s current discount of 3%.

Shares in the company currently yield 3%, with ongoing charges of 0.87%.

Claverhouse’s current top holdings are Royal Dutch Shell (LSE: RDSB), British American Tobacco (LSE: BATS) and Imperial Tobacco (LSE: IMT).  Why might that be?

A white hot yield from black gold

Shell has a proud history of never having cut its dividend since the end of the Second World War. However, the current low oil price has raised concerns about whether the FTSE 100 giant will be able to maintain that record.

Last month, Shell reported a hefty third-quarter loss of $7.4bn. However, cash flow remained strong. Indeed, despite the oil price having averaged $60 per barrel over the past 12 months, Shell’s operating cash flow has covered both investment and dividends.

At a management day earlier this week, Shell told shareholders that the company’s £47bn acquisition of BG Group is progressing towards completion, adding that the boost to free cash flow from the combined group “enhances Shell’s dividend potential in any expected oil price environment”. Management also reiterated its intention to pay a maintained $1.88 per share dividend in 2015, and “at least” $1.88 per share in 2016.

While the immediate prospect is for little or no growth in the payout, the compensation is a massive 7.1% yield at a current share price of 1,725p.

Smokin’ dividends

The Claverhouse Trust has both of the Footsie’s tobacco companies in its top three holdings. Due to the nature of the products, this mature industry is notable for its earnings visibility and cash generating capacity. The combination of stability and reliable dividends is highly prized by pragmatic investors.

However, it’s not all plain sailing for tobacco companies at the present time. In a trading update last week, British American Tobacco (BAT) said: “The trading environment remains challenging due to the slower than expected recovery in the global economy, continued pressure on consumer disposable income worldwide and significant currency headwinds”.

For the first nine months of the year, BAT reported a 4.2% rise in revenue at constant exchange rates, but a 6.5% decline at actual rates. Similarly, Imperial Tobacco, which has a 30 September financial year end, reported in its annual results this week that revenue was up 4% at constant exchange rates, but down 3% at actual rates.

While currency movements are having an adverse effect at the present time, exchange rates do ebb and flow, sometimes creating a headwind and sometimes a tailwind. Despite the current unhelpful impact on revenue, earnings are being protected by cost cutting and efficiencies. Imperial reported a 4.5% rise in earnings per share (EPS) for the year to 30 September, and this is forecast to accelerate to 10% in the coming year. Meanwhile, analysts expect flat EPS from BAT for the current year to 30 December, with growth resuming at 7% in 2016.

Both companies’ dividends are comfortably covered by earnings. Imperial’s trailing yield is 4%, at a current share price of 3,510p, while BAT has a similar 3.9%, at a price of 3,870p. These yields may not be the highest in the market, but they are among the safest around and should grow steadily over time.

Picking great dividend shares has helped JP Morgan Claverhouse outperform the FTSE All-Share Index over the past three, five and 10 years.

Among its largest holdings, the trust has overweight positions in Vodafone (LSE: VOD) (NASDAQ: VOD.US), British American Tobacco (LSE: BATS) and AstraZeneca (LSE: AZN) (NYSE: AZN.US).

Vodafone

Mobile giant Vodafone is working hard to replenish lost earnings after selling its stake in US phones firm Verizon Wireless for £84bn last year. In a trading update in February, the company reported improving revenue trends in most of its major markets, and good progress on its massive Project Spring investment programme and the integration of cable acquisitions in Germany and Spain.

Although it will be some years before earnings get back to previous levels, Vodafone is committed to paying an increasing dividend in the meantime. Analysts expect to see an 11.5p a share payout when the company announces its results for the financial year ended 31 March, giving a juicy 5% yield at a current share price of 228p.

British American Tobacco

British American Tobacco lifted its dividend by 4% for the year ended 31 December 2014 when it announced its annual results in February. The company said it expects the trading environment to remain difficult during 2015, with foreign exchange headwinds continuing to impact the business. Nevertheless, the Board said it is confident “we will deliver value to our shareholders in the short and long term”.

Analysts are forecasting another 4% increase in the dividend this year to around 154p, giving a yield of 4.1% at a current share price of 3,750p.

AstraZeneca

AstraZeneca has been through three years of falling earnings, largely as a result of expiring patents on a number of its top-selling drugs. Nevertheless, the company has been able to maintain its dividend at 280¢ a share. The good news is that the pipeline of new drugs has gone from strength to strength since Pascal Soriot came in as chief executive at the back-end of 2012.

Analysts don’t expect the pipeline to translate into a big pick-up in earnings just yet, and the consensus is for the dividend to again be held at 280¢ this year. However, at current exchange rates that translates to around 187p (compared with 178p last year), giving an above-market-average yield of 3.9%. Furthermore, there’s potential for the payout to grow strongly in the not-too-distant future.

Picking great dividend shares has helped JP Morgan Claverhouse outperform the FTSE All-Share Index over the past three, five and 10 years.

Sectors in which the trust is currently overweight against the index include financials, healthcare and telecoms. The trust’s three biggest holdings in these three sectors are: HSBC (LSE: HSBA) (NYSE: HSBC.US), AstraZeneca (LSE: AZN) and Vodafone (LSE: VOD).

HSBC

Banking giant HSBC may have ditched its advertising slogan “The World’s Local Bank” a couple of years ago, but it has remained a convenient tag for financial hacks like me to emphasise the group’s global reach.

Geographical diversification helped HSBC get through the 2008/9 financial crisis. And while the company did reduce its dividend during those dark days, the payout has been growing at a good clip since, including a 9% rise for 2013.

City analysts are expecting a more modest 4% increase this year, followed by a 7% uplift for 2015. The recent market sell-off has seen HSBC’s shares hit a 52-week low of 589p, pushing the forward dividend yield up to a juicy 5.5% for investors today.

AstraZeneca

It’s been a good year for shareholders of AstraZeneca. The shares, which started the year at 3,600p, are currently trading at 4,427p on the back of the company’s strengthening drugs pipeline and management’s confident rejection of a 5,500p takeover offer from US pharma giant Pfizer.

The improving outlook hasn’t yet fed through to a rising dividend. Analysts are expecting the 2014 payout to be pegged at $2.80 for a fourth consecutive year, and for there to be little, if any, increase in 2015.

Nevertheless, the sterling translation of the dollar dividend equates to a yield of 4%, which is comfortably above the FTSE 100 average of 3.5%. And we could see the payout begin to rise pretty strongly further down the line.

Vodafone

Vodafone has been in a period of transition since selling its stake in US phones firm Verizon Wireless to Verizon Communications for £84bn earlier this year. The mobile giant’s earnings won’t — for at least a couple of years — cover the rising dividends the company hopes to pay.

Nevertheless, management reckons it can afford to lift the annual payouts, and signalled its confidence by raising the company’s recent interim dividend by 2%. If that carries through to the final dividend, as City analysts expect, we’d be looking at a forward yield of around 5.3% at a current share price of 213p.

Picking great dividend shares has helped JP Morgan Claverhouse outperform the FTSE All-Share Index over the past three, five and 10 years.

Let’s take a look at the trust’s current top three holdings: HSBC (LSE: HSBA) (NYSE: HBC.US), Royal Dutch Shell (LSE: RDSB) and Vodafone (LSE: VOD).

HSBC

HSBC’s market capitalisation is bigger than Lloyds, Barclays and Royal Bank of Scotland combined. Unmatched geographical reach also sets HSBC apart from the FTSE 100 banking crowd.

HSBC’s progress since the 2008/9 financial crisis has recently led top City fund manager and notorious banks bear Neil Woodford to described the company as ‘investable’. HSBC reported continued falling costs and impairments for the third quarter of this year, producing another big uplift in underlying profit — and a third 11% increase for the quarterly dividend.

At a current share price of 687p, analyst forecasts imply an income of 4.7% for the current year, rising to 5.2% for 2014.

Royal Dutch Shell

Like HSBC, Royal Dutch Shell dominates its FTSE 100 sector peers. Shell’s market capitalisation is not much less than BP and BG Group combined.

In contrast to HSBC, though, Shell’s recent third-quarter update was less than inspiring. Shell reported increased upstream operating costs, weak refining conditions and a challenging environment for the company’s substantial business in Nigeria. Earnings fell more heavily during the third quarter than the already significant decline seen in the first half of the year. Nevertheless the board lifted the Q3 dividend by 5%.

The reward for investors who accept the current earnings lull, while waiting for new projects to come on stream, is a forecast 5.3% income based on the current share price of 2,185p

Vodafone

Vodafone’s shares have been on a tear since the late-summer news that the company has agreed to sell its 45% stake in US phones firm Verizon Wireless to Verizon Communications for $130bn (£84bn). Further rocket fuel has been added to the shares by recent rumours that another US phones giant, AT&T, is considering a takeover of Vodafone itself, probably after the Verizon deal completes early next year.

In first-half results released last week, Vodafone lifted the interim dividend by 8% and also confirmed it expects to lift the final dividend by the same amount (adjusted for a share consolidation connected with the Verizon disposal).

The big rise in Vodafone’s shares to a current 231p has pushed the forecast dividend yield down below 5%, but that’s still comfortably ahead of the FTSE 100 average.