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Research: Investment Companies
The Diverse Income Trust (DIVI) topped the ranking of UK high dividend yield closed end funds at its 10-year performance anniversary on par with one peer by NAV total return (TR). This multi-cap trust is little correlated with UK equity indices but reflects the UK market’s performance trend. The managers Williams and Turner believe income shares, or what they call ‘short-duration’ shares, will outperform growth equities during the continuing UK and global recovery from the pandemic.
The Diverse Income Trust |
10-year performance anniversary |
Investment trusts |
29 April 2021 |
Analysts
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The Diverse Income Trust (DIVI) topped the ranking of UK high dividend yield closed end funds at its 10-year performance anniversary on par with one peer by NAV total return (TR). This multi-cap trust is little correlated with UK equity indices but reflects the UK market’s performance trend. The managers Williams and Turner believe income shares, or what they call ‘short-duration’ shares, will outperform growth equities during the continuing UK and global recovery from the pandemic.
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DIVI’s dividend record since launch |
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Source: Bloomberg, Edison Investment Research |
Key takeaways from 10-year track record
Exhibit 1 shows DIVI’s performance, dividend growth rate and other key metrics relative to 11 UK income peers.
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DIVI has performed strongly since launch 10 years ago (28 April 2011) and continues to outperform the indices and peers. The trust is ranked in the top quartile over all the periods shown, including one, three, five and 10 years.
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DIVI’s dividend CAGR (cumulative annualised growth rate) tops the peers’ rates at 18.5%, with the peer group average of 5.5%.
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The trust has continued to deliver an attractive dividend income throughout the pandemic (see the chart above). The managers only buy shares that generate a substantial cash pay back. New holdings with high dividend and growth potential constantly refresh the portfolio.
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Revenue reserves stood at £14.4m (4.0p per share, c 1x annual dividend payment) at the end of H121 (to end November 2020).
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The board intends to at least maintain the FY21 ordinary dividend at the FY20 level (3.70p per share, up 1.4% on FY19). While c 16% of revenue reserves were used in FY20, in order to smooth dividend payments to shareholders in the wake of the pandemic (revenue per share fell 17% over the 12 months to end May), the board did not need to make further use of reserves for H121 dividends, despite an 11% fall in the trust’s revenue. Revenue earnings of 1.77p per share fully covered the two dividends in respect of the H121 period (1.75p per share). The board expects revenue to recover in coming years.
Trading at a small premium
DIVI currently trades at a 1.6% cum-fair premium, close to NAV, in line with the board’s stated key performance indicators. The trust has issued shares in the past two weeks.
Peer group
Exhibit 1: Selected peer group at 28 April 2021 based on cum-fair NAV
% unless stated |
Market cap £m |
NAV TR |
NAV TR |
NAV TR |
NAV TR 10 yr |
Discount |
ONC* |
Gearing |
Div Cover |
Div CAGR 2011-20 |
Div yield (%)** |
Diverse Income Trust |
423.7 |
40.7 |
25.9 |
53.4 |
232.9 |
1.6 |
1.1 |
100 |
1.2 |
18.5% |
3.1 |
AS Eq Inc Trust |
172.5 |
33.8 |
(7.4) |
12.5 |
78.1 |
(6.5) |
0.9 |
106 |
0.9 |
5.8% |
5.8 |
BMO Cap & Income |
344.9 |
34.8 |
11.7 |
50.4 |
110.0 |
(1.5) |
0.6 |
107 |
0.9 |
3.2% |
3.6 |
City of London |
1,735.0 |
20.9 |
5.1 |
27.3 |
101.5 |
2.8 |
0.4 |
107 |
0.5 |
4.0% |
4.8 |
Dunedin Inc Growth |
459.3 |
25.0 |
28.2 |
61.1 |
107.0 |
(3.0) |
0.6 |
105 |
1.4 |
2.4% |
4.1 |
Edinburgh IT |
1,089.9 |
32.7 |
(0.1) |
14.8 |
115.1 |
(3.3) |
0.6 |
101 |
2.0 |
2.7% |
3.8 |
Finsbury Gr & Inc |
2,028.9 |
17.0 |
25.0 |
68.4 |
233.0 |
0.5 |
0.6 |
117 |
1.2 |
6.8% |
1.8 |
JPMorgan Claver. |
421.2 |
38.5 |
9.3 |
45.0 |
107.2 |
(1.9) |
0.7 |
113 |
1.0 |
2.9% |
4.3 |
Lowland |
356.6 |
44.1 |
(1.5) |
26.6 |
112.1 |
(5.7) |
0.6 |
113 |
1.3 |
6.1% |
4.5 |
Merchants Trust |
629.1 |
41.8 |
12.3 |
47.8 |
107.1 |
1.2 |
0.6 |
109 |
0.7 |
11.6% |
5.3 |
Murray Income Trust |
1,044.1 |
21.8 |
23.7 |
54.8 |
108.5 |
(2.6) |
0.6 |
108 |
1.0 |
2.0% |
3.9 |
Temple Bar |
755.7 |
52.1 |
(1.2) |
24.9 |
86.1 |
(5.1) |
0.5 |
106 |
0.5 |
2.9% |
3.4 |
Simple av. 12 funds |
788.4 |
33.3 |
9.3 |
37.2 |
110.6 |
(2.0) |
0.7 |
107 |
1.0 |
5.5% |
4.0 |
Rank in peer group |
8 |
4 |
2 |
4 |
2 |
2 |
1 |
5 |
1 |
12 |
Source: Morningstar, Edison Investment Research. Note: TR = total return. Gearing (net) is total assets less cash and equivalents as a percentage of net assets. 100=ungeared. *ONC=ongoing charge ratio. **Based on historic dividends.
Dividend policy
DIVI’s primary objective is to provide shareholders with an attractive and growing level of income, as well as deliver capital growth over the long run. The board has a policy to build revenue reserves during the years of generous dividend payments from portfolio companies and uses them as necessary when dividend payments from portfolio companies subside, as happened during the COVID-19 pandemic.
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Despite late-night, city-centre hospitality being at the sharp end of the pandemic, Revolution Bars Group (RBG) looks to have made the best of a bad situation. While the half to December 2020 (RBG’s H121) saw the loss of 55% of trading days and sales down 73%, improved estate quality (exit from eight underperforming sites out of 74) and rental concessions have been accompanied by digital enhancement (150% y-o-y higher Revs App usage) and financial restructuring (current liquidity headroom of c £10m). Strong bookings for 17 May onwards from RBG’s target young adults, arguably at lower risk from COVID-19, and the prospect of a benign environment reinforce management confidence in continued group revitalisation, which was starting to pay off ahead of the pandemic.
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