DUNEDIN INCOME GROWTH INVESTMENT: Trust has a tight UK portfolio

Dunedin Income Growth mutual fund generates a mix of income and capital return for shareholders. It does this by investing primarily in a tight portfolio of UK companies.

Although the trust, listed on the London Stock Exchange, has had a tough 12 months, with losses of 6.9 percent, manager Ben Ritchie remains unflappable.

“What we’re trying to do,” he says, “is build a portfolio that will survive in the long run. Of course we will have good times and bad, but by focusing on quality companies, we hope to achieve solid long-term returns.”

The numbers support his argument. Despite a year’s worth of losses, the £417 million trust has generated total returns of just over 41 per cent over the past five years.

This is more than double the return of the FTSE All-Share Index of 16.1 percent.

It has also managed to continue to pay shareholders attractive quarterly earnings, equivalent to 4.4 percent per annum.

While the trust has maintained its dividends from 2009 to 2011, they have grown every year since then. And Ritchie seems confident that this record can get a sequel.

So far this financial year (which runs until the end of January) the trust has paid dividends totaling 9p per share, with the shares trading at around £2.92.

While these payments are the same as last year, it wouldn’t surprise commentators if the latest quarterly dividend check comes in higher than last year’s 3.9 pence.

“It would be nice to increase annual dividends in real terms,” says Ritchie, “but with inflation in the double digits, that’s not going to happen. So an absolute increase from last year’s 12.9 pence would be the result.’

The trust has major interests in consumer goods giant Unilever, beverage company Diageo and drug trafficking company AstraZeneca.

Like many income-focused trusts, Dunedin Income Growth has an income bank tucked away in reserve from which it can draw when needed. This amounts to about three-quarters of annual income, but is unlikely to be needed in the short term.

Ritchie likes companies with strong balance sheets and resilient earnings. This bias is reflected in the trust’s key holdings – with large holdings in consumer goods giant Unilever, beverage company Diageo and drug company AstraZeneca.

Ritchie says the potential for these companies to grow earnings against a tough economic backdrop means they should be able to turn some of this earnings into dividends.

While the fund manager thinks UK equities look cheap, he is not convinced that the UK stock market is a bargain compared to other international stock markets.

Still, he is optimistic that the portfolio he and his colleague Rebecca Maclean have built will generate returns for shareholders over the medium term.

Interests in UK companies are complemented by a number of interests in international brands such as TotalEnergies (France) and Nordea Bank (Finland).

Over the past five years, two of its UK equity income counterparts – Law Debenture and Merchants – have outperformed overall returns. These are managed by Janus Henderson and Allianz Global Investors, respectively, and have yielded gains of 53 and 49.4 percent.

Dunedin is one of a number of investment brands owned by financial behemoth Abrdn – alongside Murray.

The Income Growth Trust has better five-year records than Murray Income and Abrdn Equity Income, both UK equity income trusts. The trust’s exchange identification code is 0340609 and the market ticker is DIG. Total annual costs are competitive at 0.59 percent.