money

The pandemic presented “equity income” investment trusts with their toughest challenge to date as lockdowns sparked unprecedented dividend cuts from a broad swathe of British companies. Fortunately, these trusts passed the Covid test with flying colours (the only positive coronavirus test result you want to hear).

In 2020, only two of the 23 UK equity income trusts cut their dividends, compared with 79 of the 82 “open-ended” equivalents, according to data from the Association of Investment Companies, the trusts’ trade body. It was a similar story in 2021: two out of 22 trusts cut their dividend against 24 out of 73 open-ended funds.

This divergence underscores one of equity income trusts’ key advantages over their open-ended rivals: their ability to hold back some of the income they receive in dividends from their holdings. These reserves can be used at a later date to top up a trust’s dividend if the income from its holdings falls short.

As you might expect, a number of trusts dipped into their reserves in 2020. Since then they have focused on rebuilding them and there are now 12 trusts in the UK equity income sector that have enough reserves to cover their dividend for at least a year, according to the AIC.

A broader dividend recovery across the London market has also helped. In 2021, divis from British companies increased by 46pc to £94bn, according to data from Link Group. This was driven by a profit boom among the miners, which benefited from increased demand for commodities as economies reopened.

This recovery continued into the first quarter of this year, which saw a 12pc increase in “underlying” dividends, totalling £13.3bn, relative to the same period in 2021.

Yet in spite of this supportive backdrop, the typical UK equity income trust has delivered a total return of only 2pc over the past year, which compares with 4pc from the FTSE All‑Share index. This is likely to be down to weakness among smaller and medium-sized stocks as well as market volatility caused by the war in Ukraine and rising interest rates.



Law Debenture stands out among its rivals in this respect; it has made a total return of 9.1pc over the past year. It has an unusual structure: a basket of stocks and a professional services firm, two unlikely bedfellows that complement each other to provide investors with a stable and growing income. The professional services business, which funded 36pc of the trust’s dividends in 2021, benefits from recurring revenues as well as inflation-linked annual fees from its corporate trust division.

While Law Debenture’s yield of 3.7pc is lower than that of some rivals, it has been the top performer over five and 10 years with share price gains of 64pc and 203pc respectively. This is probably why it trades at a (tiny) premium while most rivals are at a discount.

We see no reason why Law Debenture can’t repeat this success in view of the strength of its professional services business and the tilt towards “value” within its stock portfolio. We like the fact that the managers, James Henderson and Laura Foll, can invest freely, as they are not constrained by a specific income target.

“Law Debenture is a solid fund,” says Peter Walls, manager of the Unicorn Mastertrust fund. “For us it is certainly a hold. If the discount widens, we will add more.” This column agrees. Law Debenture offers a steady income, coupled with exciting growth prospects for the long term. Hold.

Questor says: hold

Ticker: LWDB

Share price at close: 788p

Update: Secure Income Reit

Secure Income Reit, tipped here in January 2018, has agreed to merge with rival LXi Reit. Both trusts own property assets with long leases that offer inflation-linked rent rises. Secure Income shareholders will receive 3.32 new LXi shares for every share held, while a partial cash payment of 118.88p per share is also available. At LXi’s current share price the deal values Secure Income at 467.5p a share, a 13.7pc premium to its share price before the announcement.

The combined portfolio is valued at £3.9bn and around 98pc of its rental income will benefit from inflation-linked rent reviews (some subject to caps, typically at 4pc) or fixed rental increases. This column supports the deal, as it will improve liquidity and most importantly lower charges and costs. Secure Income is one to hold.

Questor says: hold

Ticker: SIR

Share price at close: 462p

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