Income investors that bought investment trusts to weather the worst of the pandemic cuts suffered a drop in pay-outs in the first half of 2021, according to the latest Link Investment Trust Dividend Snapshot. The report, which studies equity investment trusts only, showed that between January and June, dividends paid by investment companies dropped 3.1%, to £891.9m, £29m less than the first six months of 2020. It was the first time in more than a decade that investment trust pay-outs fell. Three in 10 trusts made a cut in the first half of 2021, reducing their pay-out by roughly a quarter (23%). The biggest impact was from the IT UK Equity Income sector, which contributes a quarter of all dividends from investment trusts. On average, first-half pay-outs from the sector were down 9% in the sector compared to the previous year. This was despite dividends from the UK stock market rising 8% thanks to a 50% jump in the second quarter of 2021 on the previous year. It was the first decline since the second half of 2010, when the dividend cuts following global financial crisis filtered through to investment companies. The fall was a result of pandemic-related cuts filtering through. Investment trusts pay the income that they have received from their underlying holdings, so can be several months behind any changes to their stocks. Last year, many UK stocks were forced to suspend, cut or cancel their dividend payments in an effort to retain cash to survive the pandemic and issues created by the ensuing lockdowns. Investment trusts also fared better than their open-ended counterparts, as they had been able to create ‘revenue reserves’ – extra cash from dividends of previous years that they have hoarded for future difficult years. Pre-pandemic, investment trusts had combined revenue reserves of £2.1 billion, but by the end of the first half of 2021 this had fallen to less than £1.8 billion. It meant that £22 in every £100 paid out by investment companies over the past 12 months came from reserves. Over the full 18 months from January 2020 to June 2021, investment trust pay-outs have risen 2%, compared with a 34.6% decline for UK stock market dividends. Experts remind investors that investment trust dividends cannot defy gravity, but they do come with a very plump cushion. Not only do they keep cash in reserve, but they can also bank some of the big capital gains they have made over the last year and hand these out to shareholders too.

Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This article is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as of August 2021 and the contents of the Finance Bill. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.