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Income Investment Trusts - are these the times they (relatively...) shine?

General discussions about equity high-yield income strategies
Charlottesquare
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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#300732

Postby Charlottesquare » April 14th, 2020, 9:06 pm

dundas666 wrote:
Charlottesquare wrote:
dundas666 wrote:
Off the top of your head, historically how much lower have 'income' IT yields been than a typical HYP?


Not sure how typical my HYP shares or my ITs were, but the shares used to yield an average around 5% and the ITs an average around 4%.


Thanks Charlottesquare, that's very useful to know.

(Btw I used to work around the corner from Charlotte Square in Edinburgh - is that where your moniker originates?)


Yes, though never I worked there, I just like the square . You presumably were along in Dundas Street at some point given your name.

DavidM13
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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#301116

Postby DavidM13 » April 16th, 2020, 3:09 pm

tikunetih wrote:
77ss wrote:Where are these reserves - what do they in actual fact consist of? How are they separated from the rest of the business? Is there a ring-fence? Cash with a bank? Gold? Bonds? Or are they just on paper? Real or chimerical?

I don't suppose we are going to get any further with this,


If you look back over the previous couple of pages of posts I think you should find that everything you're asking has already been answered. Maybe take another read.

But, again, a (final!) quick summary:
- companies pay divis out of what are called 'distributable reserves';
- for ITs, which are a special type of company, the 'capital reserve' and 'revenue reserve' comprise the distributable reserves;
- 'capital reserve' (accumulated, as-yet undistributed profits from asset sales) and 'revenue reserve' (accumulated, as yet-undistributed income received) are just accounting terms for items appearing on the balance sheet, see up-thread for more explanation of them;
- they are not a description of segregated parts of an IT's underlying investment portfolio;
- the balance sheet (including these reserve entries) is not describing the make-up the IT's underlying investment portfolio.

This latter point may well be the essence of confusion about these 'reserves', with people perhaps making an assumption about what they are and not realising the specific accounting meaning.

If this is still all gobbledegook then don't worry about it!

For the resident accountants, feel free to correct the above - look at the time! I'm out of here ;)


That is my understanding too. Certainly makes sense anyway!

mike
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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#301125

Postby mike » April 16th, 2020, 3:51 pm

Merchants (MRCH) have released their 4th interim dividend details. Normally this would be their "final" dividend, but as we have seen with other ITs, this is just technical to get round having a motion at the AGM. They normally issue the final dividend with their annual report, but not this year.

MRCH had previously stated they were targetting a 2020 full year dividend of 27.1p (2019 was 26.0p), and they have met their target. I had pencilled in an increase from the 26p last year, but lower than they had previously stated due to C-19. That way, they could have raised the divi by a nominal amount in 2020 and 2021 while keeping their AIC hero status in these troubled times.

There was no comment at all on the current situation except for the need for a 4th interim rather than a Final dividend.

The RNS says The full annual results for the year ended 31 January 2020 are expected to be announced by the end of April 2020, rather later than a late March date based on previous years.

Final divi is 6.8p, payable 29 May, ex-div 23 April

https://www.investegate.co.uk/merchants-trust---mrch-/rns/dividend-declaration---fourth-interim-dividend/202004161455459298J/

dundas666
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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#301278

Postby dundas666 » April 17th, 2020, 10:45 am

Charlottesquare wrote:
dundas666 wrote:
Charlottesquare wrote:
Not sure how typical my HYP shares or my ITs were, but the shares used to yield an average around 5% and the ITs an average around 4%.


Thanks Charlottesquare, that's very useful to know.

(Btw I used to work around the corner from Charlotte Square in Edinburgh - is that where your moniker originates?)


Yes, though never I worked there, I just like the square . You presumably were along in Dundas Street at some point given your name.


No, I used to live in a house on the Dundas Castle estate in South Queensferry, near the Forth Road Bridge.

JuanDB
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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#301419

Postby JuanDB » April 17th, 2020, 7:36 pm

ReallyVeryFoolish wrote:Thanks for the update on MRCH. Has anyone looked at how many confirmed dividend cutters/deferrers they have in their present portfolio? Could make a significant difference if/once the trust's income reserve gets depleted.

Cheers.

RVF.



I’ve done a fag packet analysis on this. Out of the top 10 holdings which comprise around 45% of the portfolio they have 3 cutters and a reducer. BAE, BARC, LAND are the cutters with SSE reducing. The 3 cutters are around 13% of the portfolio by value. I haven’t gone so far as to look at the relative income from each of those holdings.

This was a lower percentage than I was expecting.

I’m currently wrestling with whether to top up on MRCH. The premium widening significantly from ~6% to ~16% is a big concern. The latest NAV showed a marked decline from 390ish to 350. The share price dropping from 415 to 390 today in response. I like the 7% yield which looks reasonably safe however the premium seems a big downside risk.

Cheers,

Juan

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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#301479

Postby Spet0789 » April 18th, 2020, 8:47 am

My wife holds MRCH and I am concerned by the big premium to NAV it currently trades at.

I am sure this is due to income seekers concerned about individual HY stocks cutting divs piling in. The board have exhausted their ability to issue new stock, so the usual mechanism to keep a lid on the premium hasn’t been able to operate. They have asked for the ability to issue more.

seagles
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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#301486

Postby seagles » April 18th, 2020, 9:26 am

Spet0789 wrote:My wife holds MRCH and I am concerned by the big premium to NAV it currently trades at.

I am sure this is due to income seekers concerned about individual HY stocks cutting divs piling in. The board have exhausted their ability to issue new stock, so the usual mechanism to keep a lid on the premium hasn’t been able to operate. They have asked for the ability to issue more.


You may want to check out this thread just started on MRCH

dundas666
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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#301788

Postby dundas666 » April 19th, 2020, 3:54 pm

A quick newbie question .... how do you factor in the IT charges? Is it as simple as reducing the yield by the charge to get a "net" yield?

For example CTY is currently yielding around 5.54% and the ongoing charge is 0.39%, so does that mean that my dividend income would effectively be 5.15% ?

Thanks!

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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#301792

Postby ADrunkenMarcus » April 19th, 2020, 4:12 pm

dundas666 wrote:For example CTY is currently yielding around 5.54% and the ongoing charge is 0.39%, so does that mean that my dividend income would effectively be 5.15% ?


No.

Calculate the yield based on the dividends declared for the year expressed as a proportion of the share price or your purchase price.

The ongoing charges are borne by the company. Some will be taken from capital, some from income, depending on the trust. However, they are not subtracted from declared dividends per share.

Best wishes

Mark.

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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#301799

Postby Arborbridge » April 19th, 2020, 4:50 pm

Spet0789 wrote:My wife holds MRCH and I am concerned by the big premium to NAV it currently trades at.



Can you explain why you are worried? I can see that you may want to hold off buying some more at present, but if you are not thinking of buying, but want to hold or sell, I see no problem.
Perhaps she has a regular savings scheme, in which case one could just hold off for a couple of months and see what happens.

Arb.

dundas666
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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#301805

Postby dundas666 » April 19th, 2020, 6:03 pm

ADrunkenMarcus wrote:
dundas666 wrote:For example CTY is currently yielding around 5.54% and the ongoing charge is 0.39%, so does that mean that my dividend income would effectively be 5.15% ?


No.

Calculate the yield based on the dividends declared for the year expressed as a proportion of the share price or your purchase price.

The ongoing charges are borne by the company. Some will be taken from capital, some from income, depending on the trust. However, they are not subtracted from declared dividends per share.

Best wishes

Mark.


Ok that makes sense Mark, thanks!

monabri
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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#301830

Postby monabri » April 19th, 2020, 9:17 pm

In the case of CTY , the dividend paid is from income only - see link.

https://www.theaic.co.uk/companydata/0P00008ZME

Some Trusts flog off shares to pay a divi, hence "Capital" . Some do both!

As ADM says, base the yield on CTY's dividend / share price. (4.750p x 4) / 343p. ....(5.54% approx)

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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#302400

Postby dundas666 » April 22nd, 2020, 9:36 am

If an IT has a dividend cover of 12 months, does that mean in practical terms that if we're estimating that it will lose 50% of dividends in the short term then it actually has cover for 24 months?

Of course the IT might choose not to commit all the reserves if required, I was just thinking whether practically speaking dividend cover might be considered to be longer than the headline figure, since they're not going to lose all dividends.

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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#302408

Postby funduffer » April 22nd, 2020, 9:49 am

There has been a lot of discussion on the sustainability on IT dividends, and income reserves.

Here is an article from the IT Investor on this subject, which I don't think has been linked to before:

https://www.itinvestor.co.uk/2020/04/wi ... s-hold-up/

Spoiler alert!

Right now, it certainly looks like the average investment trust is well placed to at least maintain its dividends this year, despite all that’s been happening.

And it’s been good to see many of them have come out with specific statements to reassure their investors rather than waiting for their next formal results announcement.


FD

dundas666
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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#302443

Postby dundas666 » April 22nd, 2020, 11:18 am

ReallyVeryFoolish wrote:
dundas666 wrote:If an IT has a dividend cover of 12 months, does that mean in practical terms that if we're estimating that it will lose 50% of dividends in the short term then it actually has cover for 24 months?

Of course the IT might choose not to commit all the reserves if required, I was just thinking whether practically speaking dividend cover might be considered to be longer than the headline figure, since they're not going to lose all dividends.

I believe that to be true. My two recent IT purchases, HFEL and MRCH both seem well placed from that perspective.


OK thanks. I hold HFEL and MRCH too, as well as CTY and MYI.

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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#302468

Postby JuanDB » April 22nd, 2020, 12:16 pm

From the comments in the link Funduffer posted. https://www.retirementace.co.uk/2020/04/will-investment-trust-dividends-hold.html

Interesting analysis of the percentage reduction in income due to known dividend cutters. Temple Bar stands out 46.7%. Merchants, Lowland and Schroder Income growth are in the 30% range.

Worth a read.

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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#302470

Postby Dod101 » April 22nd, 2020, 12:28 pm

dundas666 wrote:If an IT has a dividend cover of 12 months, does that mean in practical terms that if we're estimating that it will lose 50% of dividends in the short term then it actually has cover for 24 months?

Of course the IT might choose not to commit all the reserves if required, I was just thinking whether practically speaking dividend cover might be considered to be longer than the headline figure, since they're not going to lose all dividends.


That is true but I cannot see many IT Boards being prepared to run down their Revenue Reserves in their entirety because then if dividends do not recover when the RR is exhausted either they fall off the cliff or they will need start to use Realised Capital Reserves. I think more likely the Board would take a view on the likely dividend income over the next few years and maybe supplement the revenue with some of the Revenue Reserves but still cut the dividend. They need to take a view on how long and how deep the cut to their income is likely to be.

Fundamentally they are no different to an individual running an income portfolio directly. If the income of the portfolio drops off they suffer a loos of income or dip into their reserves. Either way they are eating in to their capital and we all know that that can only be done for a limited period.

Dod

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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#302493

Postby Bathonian » April 22nd, 2020, 1:57 pm

That is true but I cannot see many IT Boards being prepared to run down their Revenue Reserves in their entirety because then if dividends do not recover when the RR is exhausted either they fall off the cliff or they will need start to use Realised Capital Reserves. I think more likely the Board would take a view on the likely dividend income over the next few years and maybe supplement the revenue with some of the Revenue Reserves but still cut the dividend. They need to take a view on how long and how deep the cut to their income is likely to be.


Hi Dod,

I respectfully disagree with your view. I think IT boards will focus on maintaining and growing the divi at all costs. In the back of their minds will surely be the thought that if they cut prior to revenue reserves running dry, then subsequently revenues recover and they could have seen this through without a cut, then that would be an unsatisfactory outcome.

Don’t forget that part of the marketing for these trusts is their divi track record and I think they will try to maintain that, whatever it takes.

Let’s not forget that paying from capital reserves or from revenue reserves is only an accounting distinction and nothing more. They could choose to use their debt facilities to continue payouts once revenue reserves are exhausted so wouldn't have to actually sell shares to pay the divi per se.

Just my view. Let’s see how it pans out.

In response to one of the above links about the % cuts so far for each portfolio, those are interesting. I feel Temple Bar must be at risk of a divi reset - portfolio manager change (albeit possibly temporary), board tendering for a new investment manager, and one of the hardest hit portfolios from a revenue perspective. Doesn’t make for great reading.

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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#302498

Postby 77ss » April 22nd, 2020, 3:19 pm

funduffer wrote:There has been a lot of discussion on the sustainability on IT dividends, and income reserves.

Here is an article from the IT Investor on this subject, which I don't think has been linked to before:

https://www.itinvestor.co.uk/2020/04/wi ... s-hold-up/

......
FD


An interesting link - thanks. For me the key point is:

However, it’s important to realise that the revenue reserve is just an accounting concept. It’s not represented by a ring-fenced pot of cash.

So while a trust can legally tap its revenue reserves to prevent it from cutting its dividend, if it doesn’t have cash set aside then it may have to sell some of its underlying investments and/or increase its level of borrowing.


Doubtless some ITs will strain every sinew to maintain or even increase their dividends, but for high income ones there may be a limit.

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Re: Income Investment Trusts - are these the times they (relatively...) shine?

#302504

Postby Charlottesquare » April 22nd, 2020, 4:06 pm

Bathonian wrote:
That is true but I cannot see many IT Boards being prepared to run down their Revenue Reserves in their entirety because then if dividends do not recover when the RR is exhausted either they fall off the cliff or they will need start to use Realised Capital Reserves. I think more likely the Board would take a view on the likely dividend income over the next few years and maybe supplement the revenue with some of the Revenue Reserves but still cut the dividend. They need to take a view on how long and how deep the cut to their income is likely to be.


Hi Dod,

I respectfully disagree with your view. I think IT boards will focus on maintaining and growing the divi at all costs. In the back of their minds will surely be the thought that if they cut prior to revenue reserves running dry, then subsequently revenues recover and they could have seen this through without a cut, then that would be an unsatisfactory outcome.

Don’t forget that part of the marketing for these trusts is their divi track record and I think they will try to maintain that, whatever it takes.

Let’s not forget that paying from capital reserves or from revenue reserves is only an accounting distinction and nothing more. They could choose to use their debt facilities to continue payouts once revenue reserves are exhausted so wouldn't have to actually sell shares to pay the divi per se.

Just my view. Let’s see how it pans out.

In response to one of the above links about the % cuts so far for each portfolio, those are interesting. I feel Temple Bar must be at risk of a divi reset - portfolio manager change (albeit possibly temporary), board tendering for a new investment manager, and one of the hardest hit portfolios from a revenue perspective. Doesn’t make for great reading.


I would caveat by mentioning that any company may only pay dividends from distributable reserves, once they have been used one may not merely borrow and use the cash to pay dividends. One in such an instance may have the cash but do not have the reserves from which to declare a dividend.

Luckily a fair few have pretty hefty realised profits which may be distributed.


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