Income Investment Trust comments on Covid-19

[Dod101]

Don't forget that the 85% distribution rule puts a floor under the dividend.

Not sure what this means. Are you saying they have to distribute 85% of their underlying income? If so I'm not sure how that helps in current circumstances. Dividends are being cut so the underlying income will probably be going down. So the issue could only be that they want to distribute more than 100% of underlying income but are not sure if it is sustainable. The floor would surely only come into effect in the good years where dividends are rising.

Fundamentally ITs must distribute at least 85% 0f their investment income in any one year in order to maintain their IT status. This gives them the important right not to pay capital gains tax on realised capital gains so that puts a floor under the dividend. Sure, income/revenue is likely to reduce for many of them but there is this minimum that they must pay out, unlike say many of the FTSE companies who might be able to afford a dividend but chose not to pay out in these 'unprecedented times'. If they want to pay more than the minimum, then it needs to come from the Revenue Reserves (that is reserves set aside from earlier years where they pay out less than 100% of their investment income) or from capital in the form of realised capital gains.

It means that ITs are likely to at least pay some dividend, the 'floor' that I mention.

Dod

[nmdhqbc]

Sure, income/revenue is likely to reduce for many of them but there is this minimum that they must pay out, unlike say many of the FTSE companies who might be able to afford a dividend but chose not to pay out in these 'unprecedented times'.

OK, so compared to an individual company it is forced to pay out more dividends. Compared to an open ended fund say this rule does not help or hinder holders. They have to pay out 100% of their income which is more. And the individual companies that don't have to pay out 85% of their earnings or cash flow is what the trusts and open ended funds hold anyway.

I don't think this is the moment the 85% rule helps. The rule has done its work already by allowing them to hold back some income in the better years. And if that number was lower they would have been able to put more in the reserves if they chose to.

[Dod101]

The 85% rule has helped in that the typical IT will have distributablerevenue reserves which an open ended fund does not, It also helps when compared to a trading company which can and does chose to suspend the dividend if it deems that to be a good idea.

The other thing which an IT can do these days is chose to distribute realised capital gains which an open ended fund cannot, Some very low yielding ITs do this already, inter alia, Scottish Mortgage, Personal Assets and RIT Capital Partners.

Dod

[nmdhqbc]

The 85% rule has helped in that the typical IT will have distributablerevenue reserves which an open ended fund does not,

Yep, exactly as I said above - "The rule has done its work already by allowing them to hold back some income in the better years"

I 100% am on board with preferring Investment Trusts and their benefits. I was just confused by this "floor" notion since the floor is not the issue now or ever really for collective funds. The issue would be the floor being too high (100%) for open ended funds in the good times. As I said, the trusts and funds own those companies that can choose to pay zero dividend.

[Itsallaguess]

The 85% rule has helped in that the typical IT will have distributable revenue reserves which an open ended fund does not,

Yep, exactly as I said above - "The rule has done its work already by allowing them to hold back some income in the better years"

I 100% am on board with preferring Investment Trusts and their benefits.

I was just confused by this "floor" notion since the floor is not the issue now or ever really for collective funds. The issue would be the floor being too high (100%) for open ended funds in the good times. As I said, the trusts and funds own those companies that can choose to pay zero dividend.

The way I took the 'floor' notion from Dod's post was when used in comparison with single-share companies who can clearly have a much wider set of 'options' with regards to dividend-divestment (or not!), whether those 'options' are led by the single-share companies themselves, or perhaps taken care of by 'outside intervention', as in the case of some of the external pressures being seen from elsewhere at this time..

Even with the above said, however, I'm not quite sure I'd even place *that much* confidence in the current '85% distribution' requirements as being any sort of 'guarantee' at all anyway, as it's clear that the UK Government are quite willing to come up with new 'special situations' at this current time, and who's to say that IT-dividends can't ever be part of those potential processes...

Cheers,

Itsallaguess

[Dod101]

IAAG

That was the point I was trying to make as regards ITs v trading company shares but I gave up!

Personally I doubt that we will get government interference with the rules for ITs. I cannot think that there would either be any justification nor benefit in doing so but who knows?

I am at the stage now when I am not counting on any dividend until it is actually paid and in my account.

Dod

[nmdhqbc]

That was the point I was trying to make as regards ITs v trading company shares but I gave up!

OK, so compared to an individual company it is forced to pay out more dividends. ....... And the individual companies that don't have to pay out 85% of their earnings or cash flow is what the trusts and open ended funds hold anyway.

I have acknowledged that I understood you were comparing it to individual companies. So you gave up on something you already achieved! I then made the point that the trust own those individual companies anyway so it all comes out in the wash. Those companies being able to cut dividends means the dividends received goes lower for trusts anyway depending on how well luckily they choose them. That point was ignored. I am not the best communicator but you're playing your part too in this merry go round of a conversation.

And i still think the overriding and vastly more relevant point is that dividends trust are due to receive are going down so the lower limit on what they can pay out will not be a factor soon. The problem is they will have to distribute more than 100%. And a "floor" of 85% would actually be better if it was lower for holding back income in good years.

[Dod101]

Thanks nmdhqbc. I absolutely acknowledge that the dividends from ITs ultimately depend on the revenue they receive in the form of dividends from companies in which they are invested. That is why I am a bit sceptical of the strong advocates of the likes of City of London IT almost as though that trust has some dispensation from the normal rules.

However they do have a built in diversification which can be beneficial although the said City of London had at 31 December 2019 anyway a holding in Swire Pacific. That sounds like a diversification too far considering that SP has a controlling shareholding in Cathay Pacific and Swire Pacific Offshore (Oil service vessels)

Fundamentally though IAAG has made the main point which is that an IT must distribute at least 85% of their revenue in order to maintain the tax benefits of an IT and are not able to turn the tap on and off such as many of the individual companies have done in the last month or so.

Dod

[mc2fool]

Fundamentally though IAAG has made the main point which is that an IT must distribute at least 85% of their revenue in order to maintain the tax benefits of an IT and are not able to turn the tap on and off such as many of the individual companies have done in the last month or so.

While it is, of course, true that "normal" companies may choose how much of their revenue to distribute as dividends, the reason that many of those individual companies have turned the dividend tap off in the last month or so is because they are no longer receiving any (net) revenue.

The fact that they don't have to distribute at least 85% of their revenue is by the by -- exactly as it will be if an IT no longer receives any revenue; 85% of zero is zero.

[richfool]

With regard to the dividend income points being discussed, the beauty of IT's is that because of the income reserves they build up (from the 15% they can retain) there will be a time lag before they would be forced/obliged to reduce their dividend payouts. During that time lag, if it doesn't go on too long, the underlying stocks they hold (that have suspended dividends) may well return to a position where they can recommence paying their dividends. In the meantime, current holders of IT's will in effect be receiving dividend income that in part had previously been received and accumulated by the trust. In effect there will be a cushion and a time lag. Also, during that time lag, trusts will, if they choose, be able to change the underlying stocks they invest in to support their income objectives, as some have already been doing.

[nmdhqbc]

However they do have a built in diversification which can be beneficial although the said City of London had at 31 December 2019 anyway a holding in Swire Pacific. That sounds like a diversification too far considering that SP has a controlling shareholding in Cathay Pacific and Swire Pacific Offshore (Oil service vessels)

Yes they do have diversity. I agree. 85% rule not really in play on this point though.

Fundamentally though IAAG has made the main point which is that an IT must distribute at least 85% of their revenue in order to maintain the tax benefits of an IT and are not able to turn the tap on and off such as many of the individual companies have done in the last month or so.

OK, well I've explained above why I don't see this as a relevant or main point so I won't repeat. I can agree to disagree without a further attempt to get the last word beyond this from me.

[mickeypops]

IAAG

I am at the stage now when I am not counting on any dividend until it is actually paid and in my account.

Dod

Me neither. So far though, my Investment Trust Income Portfolio, which helps support our retirement, is holding up in terms of dividends, including declarations for May. I’m not sure how long this will continue but I’m encouraged thus far.

[JuanDB]

From the largely reassuring comments made by a number income ITs I believe their boards fully understand the product their companies produce, and we as customers buy, is dividend income. In that sense I believe the objectives of the board and shareholders / customers are fully aligned.

However I hope those boards take a balanced view between preserving their rising dividend track records and ensuring long term health of the trusts. Leveraging to pay dividends or paying an excessive proportion of dividends from capital will be warning signs that I will be reading the monthly updates from my holdings to spot.

Cheers,

Juan.

[Dod101]

From the largely reassuring comments made by a number income ITs I believe their boards fully understand the product their companies produce, and we as customers buy, is dividend income. In that sense I believe the objectives of the board and shareholders / customers are fully aligned.

However I hope those boards take a balanced view between preserving their rising dividend track records and ensuring long term health of the trusts. Leveraging to pay dividends or paying an excessive proportion of dividends from capital will be warning signs that I will be reading the monthly updates from my holdings to spot.

Leveraging to pay dividends seems unlikely; that would be simply a matter of cash flow. They need to have the distributable reserves. A fair number of trusts pay some of the dividend from capital and it does not seem to do them any harm although they are usually growth trusts rather than income ones.

Dod

[DavidM13]

https://www.theaic.co.uk/financial-advi ... 3A01/0151M

Aberdeen Latin American Income

"the Directors note the revenue reserve that has been built up during better times. The revenue reserve provides the Company with up to one years' dividend reserve. The Board's current intention is that interim dividends will continue to be paid quarterly, subject to cash levels being sufficient to allow the Company to do so, and that in the current financial year revenue reserves will be utilised where there is a shortfall in earnings. Revenue reserves have been built up with just such a contingency in mind"

[mike]

https://www.theaic.co.uk/financial-advisers/companydata/0P0000PRF4/announcements/2020-05-06/07%3A02%3A01/0151M

Aberdeen Latin American Income

"the Directors note the revenue reserve that has been built up during better times. The revenue reserve provides the Company with up to one years' dividend reserve. The Board's current intention is that interim dividends will continue to be paid quarterly, subject to cash levels being sufficient to allow the Company to do so, and that in the current financial year revenue reserves will be utilised where there is a shortfall in earnings. Revenue reserves have been built up with just such a contingency in mind"

Happily, most of the comments regarding the trusts using revenue reserves have said something along similar lines.

The only real disappointment regarding their comments was Schroder Income Growth (SCF). Back on 31 March they stated

This dividend is unchanged from the first interim dividend at 2.50 pence per share. In maintaining the dividend at this level, the board is very aware of the current unique circumstances and uncertainties and will therefore be keeping the future level of dividends under close review.

No encouragement at all they are going to use their reseves in that statement, despite having a large revenue reserve at last year end (Aug-19) of around 18 months, and of their latest Top 10 holdings, only BAE Systems has 'postponed' their dividend. Of those already declared, Tesco may find they are under political pressure to withdraw theirs, and BP we'll have to see. Their half year report is due towards the end of this month, so we will have a clearer picture then.

[Arborbridge]

The only real disappointment regarding their comments was Schroder Income Growth (SCF). Back on 31 March they stated

This dividend is unchanged from the first interim dividend at 2.50 pence per share. In maintaining the dividend at this level, the board is very aware of the current unique circumstances and uncertainties and will therefore be keeping the future level of dividends under close review.

No encouragement at all they are going to use their reseves in that statement, despite having a large revenue reserve at last year end (Aug-19) of around 18 months, and of their latest Top 10 holdings, only BAE Systems has 'postponed' their dividend. Of those already declared, Tesco may find they are under political pressure to withdraw theirs, and BP we'll have to see. Their half year report is due towards the end of this month, so we will have a clearer picture then.

In the scale of disappointments I've had lately, that's positively enthusiastic

I take it that they are just leaving their options open and lying low until the position is clearer. They don't say they are going to cancel, which has to be a positive these days, and neother do they say they are not going to use reserves. Since reserves are there for a purpose, I'd take the default position to be that they will use them unless they say otherwise to at least maintain the dividend for the time being.

Or maybe it's sunny and I just feel happy.



Arb.

[JuanDB]

From the largely reassuring comments made by a number income ITs I believe their boards fully understand the product their companies produce, and we as customers buy, is dividend income. In that sense I believe the objectives of the board and shareholders / customers are fully aligned.

However I hope those boards take a balanced view between preserving their rising dividend track records and ensuring long term health of the trusts. Leveraging to pay dividends or paying an excessive proportion of dividends from capital will be warning signs that I will be reading the monthly updates from my holdings to spot.

Leveraging to pay dividends seems unlikely; that would be simply a matter of cash flow. They need to have the distributable reserves. A fair number of trusts pay some of the dividend from capital and it does not seem to do them any harm although they are usually growth trusts rather than income ones.

Dod

Agree unlikely but not impossible? If I see trust with declining income and increased gearing that are maintaining or increasing their dividend that will be pretty bad smell.

I don’t think it’s a near term issue as agreed most trusts have around a year of reserve. 12-24 months will be the time horizon I think.

Cheers,

Juan.

[Wasron]

Princess Private Equity (PEY) halving dividend

(I think thus was announced last Friday, so apologies if this has already been posted)

https://www.londonstockexchange.com/exc ... 24760.html

“In FY2019 it paid a total dividend of EUR 0.58 per share via interim dividends in June and December. However, while the economic outlook remains uncertain, the Company does not believe it would be prudent to maintain the dividend at this level.

The Company expects to pay a total dividend of not less than EUR 0.29 per share for FY2020.”

Wasron

[richfool]

No change on my recently received dividends from: BMPI, MCT, SOI and MATE.

BMO Managed Portfolio Income trust
Middlefield Canadian Income trust
Schroders Oriental Income
JP Morgan Multi-Asset trust

AAIF (Aberdeen Asian Income) is due on 22nd May and then another bevy on 29th May.