How many IT's...

[Alaric]

This should ensure, as far as one can, that the income is sustainable. But .... ?

To retain the special taxation status of an Investment Trust, 85% of interest and dividend income has to be distributed. That and the general convention of not reducing dividends except in really dire circumstances is a protection of dividend sustainability not present when investing in individual companies.

[IanTHughes]

This should ensure, as far as one can, that the income is sustainable. But .... ?

To retain the special taxation status of an Investment Trust, 85% of interest and dividend income has to be distributed. That and the general convention of not reducing dividends except in really dire circumstances is a protection of dividend sustainability not present when investing in individual companies.

Surely, if when investing in individual companies an investor only drew down 85% of dividend amounts received, would that not achieve exactly the same thing?


Ian

[Alaric]

Surely, if when investing in individual companies an investor only drew down 85% of dividend amounts received, would that not achieve exactly the same thing?

Unlikely given that some ITs are over a hundred years old, so there would be dividend reserves already in existence on day 1 of an individual's investment. You've got diversity as well provided the IT doesn't bet the farm unsuccessfully on a limited range of Companies.

[Lootman]

This should ensure, as far as one can, that the income is sustainable. But .... ?

To retain the special taxation status of an Investment Trust, 85% of interest and dividend income has to be distributed. That and the general convention of not reducing dividends except in really dire circumstances is a protection of dividend sustainability not present when investing in individual companies.

Surely, if when investing in individual companies an investor only drew down 85% of dividend amounts received, would that not achieve exactly the same thing?

It might except that you'd still have to pay income tax on the 100% that was distributed. If you allow the IT to do that for you then income tax is only liable on the 85% that is distributed.

Of course that assumes that every IT distributes exactly 85% of the internal dividends received, and I don't know if that is common.

ITs are also tax friendly in that they do not pass through realised capital gains on its portfolio, but if you did the same changes yourself then you would incur CGT.

Where ITs can be less tax-friendly is when they distribute capital gains as dividends. This imposes extra income on you, and therefore an extra income tax liability that you might not want. I'm not a big fan of that.

Tax aside, as you suggest, you could employ such a smoothing mechanism yourself. Although others may argue that it's better to have the discipline imposed upon you.

[IanTHughes]

Surely, if when investing in individual companies an investor only drew down 85% of dividend amounts received, would that not achieve exactly the same thing?

Unlikely given that some ITs are over a hundred years old, so there would be dividend reserves already in existence on day 1 of an individual's investment. You've got diversity as well provided the IT doesn't bet the farm unsuccessfully on a limited range of Companies.

An individual investor can just as easily start out with a dividend reserve of whatever amount is considered necessary and of course such a reserve would be under the individual investors control and available if required, not held by some other party. I would certainly prefer that!


Ian

[tjh290633]

Of course that assumes that every IT distributes exactly 85% of the internal dividends received, and I don't know if that is common.

We know that sometimes they make use of their revenue reserve to maintain or raise the dividends paid.

TJH

[Alaric]

Of course that assumes that every IT distributes exactly 85% of the internal dividends received, and I don't know if that is common.

85% is the HMRC test to ensure that there aren't excessive gains or income being sheltered.

In practice, they would use the dividend reserve to manage dividends with a view to never having to reduce them and increasing them in line with expectations.

There are a number of ITs in the FTSE 350 and you can look back and see how they coped with 2007-2008. For an investor purely interested in income received, CTY, seen sometimes as a proxy for the FTSE Indexes had a clean run in terms of not decreasing dividends paid through the turmoil.

https://www.dividenddata.co.uk/dividend ... y?epic=CTY

[Wasron]

In practice, they would use the dividend reserve to manage dividends with a view to never having to reduce them and increasing them in line with expectations.

There are a number of ITs in the FTSE 350 and you can look back and see how they coped with 2007-2008. For an investor purely interested in income received, CTY, seen sometimes as a proxy for the FTSE Indexes had a clean run in terms of not decreasing dividends paid through the turmoil.

https://www.dividenddata.co.uk/dividend ... y?epic=CTY

This is where i’d return in terms of thinking about how many ITs. If the transition to ITs is to simplify management whilst maintaining an income flow then you don’t want to become too exposed to the impact of an IT cutting its dividend.

Last year I had European Assets Trust (EAT) and Funding Circle Income Fund (was FCIF, now renamed) reducing their dividend.

FCIF was a sector-specific IT, so let’s set that aside, but EAT is a regional IT, so one could reasonably have picked that as one of a handful of ITs to make up the portfolio. I think the cut was around 25%, so if it had made up 20% of the portfolio income then that would have been an income reduction of 5%.

[Backache]

In practice, they would use the dividend reserve to manage dividends with a view to never having to reduce them and increasing them in line with expectations.

There are a number of ITs in the FTSE 350 and you can look back and see how they coped with 2007-2008. For an investor purely interested in income received, CTY, seen sometimes as a proxy for the FTSE Indexes had a clean run in terms of not decreasing dividends paid through the turmoil.

https://www.dividenddata.co.uk/dividend ... y?epic=CTY

This is where i’d return in terms of thinking about how many ITs. If the transition to ITs is to simplify management whilst maintaining an income flow then you don’t want to become too exposed to the impact of an IT cutting its dividend.

Last year I had European Assets Trust (EAT) and Funding Circle Income Fund (was FCIF, now renamed) reducing their dividend.

FCIF was a sector-specific IT, so let’s set that aside, but EAT is a regional IT, so one could reasonably have picked that as one of a handful of ITs to make up the portfolio. I think the cut was around 25%, so if it had made up 20% of the portfolio income then that would have been an income reduction of 5%.

To be honest that is the nature of equity investment . Dividends whether from individual companies or companies collectively in the form of OEIC's IT's or even indices and associated trackers do not have guaranteed income levels. IT's have a better record than most though.

[mike]

Last year I had European Assets Trust (EAT) and Funding Circle Income Fund (was FCIF, now renamed) reducing their dividend.

FCIF was a sector-specific IT, so let’s set that aside, but EAT is a regional IT, so one could reasonably have picked that as one of a handful of ITs to make up the portfolio. I think the cut was around 25%, so if it had made up 20% of the portfolio income then that would have been an income reduction of 5%.

From the AIC website, EAT mainly paid its dividend from capital, not income. It also has a zero revenue reserve currently shown. This leaves it particularly open to problems caused by market falls.

https://www.theaic.co.uk/companydata/232 Click on "View dividend history" for more dividend info.

Higher up this thread, in an effort to ensure stability of income as far as is reasonable, I noted that the financial criteria for ITs I look at are
- yield
- increasing dividend
- how many months of revenue reserve
- increasing revenue reserve (unless there is an 'event' such as 2008)
- paying dividend only from income, not capital.

I cannot see a reason to deviate from these criteria to try to avoid cuts as happened to EAT.