How these Dividend Heroes match up to inflation and bond yields

The City of London Investment Trust recently became the first trust to have increased its dividend for 60 consecutive years.

To put this into context, its record started back in 1966, which was the last time the England men’s team won the football World Cup.

This makes it one of the Association of Investment Companies ‘Dividend Heroes’, a group of trusts have increased their full-year dividends annually for at least the past 20 years.

There are a few others on City of London's tail, with Bankers, Alliance Witan and Caledonia Investments currently sitting on 59 years of consecutive increases.

Like dividends paid out by other UK stocks, investors often use those from investment trusts to help pay an income, particularly during retirement. Although these dividends are never a guarantee, those with decades of consistency will have this payment as a core part of their approach.

For investors looking to use dividends to fund their post work life in particular, you want your dividends to at least grow in line with inflation, or even better, to stay ahead of it.

AJ Bell analysed the 10 Dividend Heroes which have boasted an annual dividend increase every year for at least the past 50 years, and compared the compound annual growth rate (CAGR) in the dividend to inflation since 2016.

In short, while these trusts may have delivered a consistent increase in the dividend, has this increase kept up with consumer prices?

Two out of the 10 trusts failed to grow their dividend ahead of the UK’s current 3.5% inflation rate and 3.3% 10-year average.

Headliner City of London didn’t pass the threshold, along Murray Income.

How do trusts increase their dividends?

Unlike other companies listed on the stock exchange paying a dividend, like GSK or BP, trusts have a special ability to reserve income (up to 15% a year) which they can use to keep paying or in the case of the Heroes, increase the dividend annually, even during leaner years when they receive less income from their underlying holdings.

Akin to storing up nuts for the winter, this helps provide the consistency income investors want. But a regularly growing dividend doesn’t necessarily mean that the it will jump massively year-on-year. The CAGR in the dividend may encompass smaller piecemeal increases alongside more significant ones.

For example, Alliance Witan, whose dividend growth has kept ahead of inflation on a 10-year view, unveiled a big uplift in the dividend in 2021 after it was able to access some previously restricted cash reserves via a policy change.

How do they compare to bond yields?

As well as keeping pace with inflation, AJ Bell examined how these trusts’ current dividend yields compared to their other income competition: bonds.

Bonds are IOUs issued by governments and companies, and when you own one, you are paid a regular coupon on the loan. At the end of a bond’s lifespan, when it matures, you’re repaid the face value of the bond.

You can buy bonds for a myriad of timelines. Government bonds often mature after one, three and five years, with 10-year bonds often the most widely followed.

In the 2010s bond yields were very low but yields have risen to multi-year and, in some cases, multi-decade highs thanks to higher inflation, most recently linked to conflict in the Middle East and the resulting spike in energy prices.

In the UK, the yield on 10-year government bonds or gilts is 5.4% and US 10-year government bonds yield 5.12%.

Long-term bond yields are now ahead of all 10 of the Heroes’ current dividends, the highest of which is currently Murray Income at 4.28%.

In fact, only City of London is the other trust offering at least a 4% yield, with JPM Claverhouse just under at 3.95%. The rest range from 1.19% (F&C) to 2.86% (Scottish American).

However, a key element of most bonds is the income they pay out is fixed. As we have discussed investment trusts have the capacity to increase their dividends and the Dividend Heroes have a long track record of doing so, which is an important part of the calculation for investors too.