Hotter-than expected UK inflation for January, with headline CPI up 3% year-on-year versus the 2.8% expected, combined with a volatile geopolitical backdrop, means investors should be seeking ways to protect their income.

Shares has long championed the unique advantage investment trusts have when it comes to paying regular and progressive dividends, since these funds are able to hold back up to 15% of the income they receive from their investments in their revenue reserves.

They can use these reserves to boost dividends during lean spells when businesses may be cutting their payouts. This structural benefit has enabled many investment companies to pay consistently rising dividends through both good and bad years for many decades, a record unrivaled by other funds such as unit trusts.

You may have heard of the AIC’s (Association of Investment Companies) ‘Dividend Heroes’, classified as trusts which have increased their dividends for 20 or more years in a row - impressively, 10 of these dividend heroes have over half a century of unbroken annual increases under their belts.

The AIC’s well-followed list helps you spot products with lengthy dividend growth streaks, but you’ll need to do some digging to discover which ‘heroes’ have consistently delivered the best total returns, or for that matter, whether those returns have predominantly come from capital growth or income.

Fear not, however, as care of our friends at the AIC, Shares has crunched the numbers going back 20 years to see which dividend heroes have made the most money for shareholders.

Read on for a run-through of the heroes which have consistently delivered for shareholders and for detailed profiles of the top three performers, who take their place on our winners’ podium adorned with gold, silver and bronze medals.

HOLDING OUT FOR SOME HEROES

In recent years, the concept of dividend heroes has really taken off with qualifying investment trusts eager to hold on to their position within the AIC’s index. After all, dividend hero status is a valuable marketing tool.

At the time of writing, there are 19 investment trusts qualifying for dividend hero status, with City of London (CTY), Bankers (BNKR) and Alliance Witan (ALW) sporting 58 consecutive years of dividend hikes apiece; these three trusts started paying their shareholders higher dividends in the same year England won the World Cup, and they’ve not stopped since!

Hot on their heels is the Cayzer family-controlled Caledonia Investments (CLDN) with 57 years of consecutive payout growth to crow about, followed by The Global Smaller Companies Trust (GSCT) on 54 years, with F&C (FCIT) and Brunner (BUT) tied on 53 years apiece.

The AIC also keeps a list of the next generation of dividend heroes, which are those trusts with more than 10 years of consistently rising dividends but less than 20 years.

DELIVERING DOWN THE DECADES

Over the last 20 years, the best share price total return performer by far with a 1,978.37% haul is Scottish Mortgage (SMT), Baillie Gifford’s flagship trust which aims to identify and back the world’s most exceptional growth companies, followed by the Paul Niven-steered one-stop-shop fund F&C with a 775.23% gain, then BlackRock Smaller Companies (BRSC) with a princely return of 735.59%.

One observation is both Scottish Mortgage and F&C offer fairly skinny yields of 0.38% and 1.23% respectively, while the bulk of their two-decade returns – 76% and 62% respectively – has come from capital growth rather than income, but they have still rather cannily edged their payouts higher down the decades to retain their prized dividend hero status.

In the case of our bronze medal winner, BlackRock Smaller Companies, over 60% of its 20-year total return has come from capital growth, which is unsurprising given the trust’s bread and butter is backing fast-growing, innovative UK-listed firms.

Skinning the performance cat in a different way are some of the other ‘heroes’ with robust 20-year performance records, for whom dividends have been the predominant driver of total returns.

Take the popular City of London, the UK Equity Income sector stalwart managed by Job Curtis which has delivered a 20-year share price total return of 373.43%.

Three-quarters of that return was derived from the income component with the balance from capital growth, demonstrating the importance of persistently rising payouts to shareholders over time.

Meanwhile, 87% of high-yielding Merchants’ (MRCH) two-decade total return has been generated by income.

Over 10 and five years, the income component has driven 87% and 98% of Merchants’ total return respectively, with dividends delivering 86% and 94% of City of London’s return.

Another name which leaps out of the 20-year performance table is Value and Indexed Property Income (VIP), which currently trades on a plump 7.45% yield and boasts a dividend growth record stretching back 37 years. A whopping 99% of the UK commercial property investor’s total return has emanated from income.

CAPITAL IDEAS

On a three-year view, the capital component has driven more than three-quarters of the positive total returns from global trusts Alliance Witan, Brunner (BUT), and F&C.

This makes sense, since these funds have exposure to market-dominating mega-cap US tech names including Microsoft (MSFT:NASDAQ) and Alphabet (GOOG:NASDAQ), with all three invested in another AI beneficiary, Taiwanese chip maker TSMC (2330:TPE).

Conversely, some 90% of the three-year return generated by The Global Smaller Companies Trust (GSCT) has come from income during a period when small-caps have been firmly out of favour with investors.

Shares highlighted the bull case for this small- and mid-cap one-stop-shop, which offers portfolio builders a simple way to access the growth potential of exciting growth companies around the globe, in August last year.

It is a similar theme at CT Capital & Income (CTUK), the quarterly dividend-paying hero with three decades-plus of uninterrupted dividend growth to boast about, where distributions have spoken for 89% of the return.

Managed by veteran stock picker Julian Cane, CT Capital & Income’s dividend has increased every year since launch in 1992 and grown at almost twice the rate of inflation over that period to boot. 

GOLD MEDAL

Scottish Mortgage (SMT) £11.34

Market Cap: £13.83 billion

Discount to NAV: 10.7%

The UK’s biggest investment trust, Baillie Gifford-managed Scottish Mortgage, is the clear winner over 20 years, generating a total share price return of 1,978%, equivalent to an annualised return of 16.4% a year.

The bulk of the gains (76%) have come from capital gains, with just 24% coming from reinvested dividends, whereas the average split across the illustrious group of dividend heroes is 60% from income and 40% from capital.

This split isn’t too surprising given SMT’s investment philosophy, which is to own ‘the world’s most exceptional growth companies’.

These types of companies tend to be leaders in their fields and at the cutting edge of new industries, meaning they prioritise investing in growth over paying out dividends.

Fund managers Tom Slater and Lawrence Burns believe share prices follow business fundamentals over the long-term, while short-term price movements are overwhelmingly driven by other factors.

During 2022, rising interest rates impacted growth companies disproportionately, leading to underperformance of the trust, but the managers believe part of their edge is the ability to look through such ‘noise’ and focus on long-term business performance.

Arguably, the trust’s long-term success reflects the managers’ good judgement in backing the best growth companies which is then reflected in higher share prices.

Looking outside the publicly-quoted holdings, around a quarter of the fund is invested in private companies.

Scottish Mortgage owns stakes in half the world’s top 10 unicorns (private companies valued at more than $1 billion), including SpaceX, the fund’s largest position, Chinese social media group and Tik-Tok owner ByteDance, online payment processing group Stripe and video games maker Epic Games.

Some of the private companies the trust originally invested in have become publicly traded and still remain in the fund, such as music streaming firm Spotify (SPOT:NYSE) and Chinese shopping platform Meituan (3690:HKG).

The top 30 positions in the fund represent 79% of the portfolio and three have been held for more than a decade, including Amazon (AMZN:NASDAQ), Tesla (TLSA:NASDAQ) and Dutch semiconductor equipment maker ASML (ASML:AMS).

Over the last decade, the trust’s top five performing holdings have contributed nearly 60% of the fund’s total returns, with Amazon contributing the most in terms of absolute percentage points, while AI darling Nvidia (NVDA:NASDAQ) is the fund’s best performing holding, rising an incredible 10,188% over that timeframe.

Looking forward, it seems a fair bet the proven investment skills of Slater and Burns should continue to deliver strong investment returns, although, as they themselves acknowledge, returns are often accompanied by high volatility. [MG]

SILVER MEDAL

F&C Investment Trust (FCIT) £11.91

Market cap: £5.74 billion

Discount to NAV: 6%

Launched back in 1868, F&C (FCIT) has the distinction of being the world’s oldest collective investment trust.

Although it is a Dividend Hero, with more than 50 years of consecutive increases, it has always focused more on growth investing than income.

In the late 19th century, it owned government bonds in countries which today we might think of as emerging markets like Brazil, Egypt and Turkey, as well as US railroad company bonds just as investment in the railways boomed.

In the 1920s, the trust diversified into stocks, and since the early 2000s it has invested in private equity, both as a way of diversifying risk and creating potential for large capital gains.

Until 2013, much of the trust’s equity holdings were in UK-listed companies, but since then it has renewed its original focus of investing overseas and today less than 10% of its assets are in UK-listed stocks.

A look at the top holdings shows the focus on growth and foreign markets, with the six of the ‘Magnificent Seven’ in the top six positions
by weight.

Speaking to the AIC (Association of Investment Companies) in December on the outlook for markets in 2025, manager Paul Niven said he was ‘relatively constructive on equities,’ in particular US tech stocks, where he argued earnings growth outweighed any valuation concerns.

‘Valuations are high, though this tends to be concentrated in the US and in the obvious names such as the Magnificent Seven. Although the premium levels of growth which are expected from this area look set to diminish, their earnings delivery should still comfortably outstrip that of the wider market. While numerous other areas and markets are trading at lower levels of valuation, growth prospects in these areas typically still appear far more fragile or anaemic.’

However, it would be wrong to assume US tech stocks have driven the trust’s performance – if we rewind to 2014, the 10-year total return was 173%, yet there was just one tech stock in the top 10 holdings, Alphabet (GOOG:NASDAQ), or Google as it was called back then, while the rest were mainly US and European health care companies plus BP (BP.A) and HSBC (HSBA).

There are a number of stocks in the portfolio today which were in the portfolio 20 years ago, including Shell (SHEL), which was one of the trust’s first ever equity purchases in 1925, and has returned around 300% over the past 20 years.

Other names which the trust owned 20 years ago, and which are still in the portfolio today, include AstraZeneca (AZN) (total return 1,110%), Elevance Health (ELV:NYSE) (1,080%), RELX (REL) (1,200%), SAP (SAP:ETR) (1,370%) and TSMC (2330:TPE) (7,000%). [IC]

BRONZE MEDAL

BlackRock Smaller Companies (BRSC) £13.07

Market Cap: £585 million

Discount to NAV: 13%

Less well-known than the other podium-placed names in our list of dividend heroes measured by 20-year total return, BlackRock Smaller Companies has found the going a little more tough in recent times.

This, and the trust’s near 13% discount to net asset value, is a reflection of the relatively weak sentiment towards the small-cap space.

Nonetheless, it’s not a huge surprise to see a smaller companies trust score well over the long term given small-caps have more scope to grow than their larger listed counterparts.

Run by Roland Arnold for nearly seven of the past 20 years, the trust is almost exclusively UK-focused and as its strong total return record would imply it has consistently beaten the benchmark.

These are ‘smaller’ rather than small companies – the top 10 holdings have an average market cap of roughly £950 million.

Some names have been in the portfolio for some time: flexible office space provider Workspace (WKP), for example, was a holding 10 years ago.

Other names in the top 10 are publishing outfit Bloomsbury (BMY), engineering and infrastructure firm Hill & Smith (HILS) and mobile payments company Boku (BOKU:AIM).

House broker Shore Capital outlines the trust’s investment process: ‘Through bottom-up stock selection, the manager seeks quality companies with the potential to grow significantly. Typical attributes include competent management teams, attractive growth prospects irrespective of market conditions, good cash generation and strong balance sheets.

To identify these opportunities, the BlackRock team spends a considerable amount of time with company management teams, often attending  over 700 company meetings a year.

As Shore notes, the focus is on capital appreciation but it is the bias towards cash-generative companies which has supported the trust’s ability to keep raising the dividend for 21 years and counting.

The financial discipline required to pay a regular dividend can be a good marker of quality in a universe where corporate failures are more commonplace.

In his most recent commentary on the trust’s performance, manager Arnold notes the valuation of UK small- and mid-cap companies is ‘attractive on an historic basis’.

‘As we move through this near-term noise, the opportunity presented by UK small- and mid-caps will present itself, and maybe we will finally see investors looking to allocate back to what has historically been a profitable asset class,’ adds Arnold.

The ongoing charge is 0.8%, which is fairly competitive compared with other trusts in the Association of Investment Companies UK Smaller Companies sector. [TS]