Investment trust Merchants represents an attractive proposition for investors in search of income.
Last week, the £656million fund, managed by Allianz Global Investors, appeared on a list of ‘dividend heroes’ published by trade organisation, the Association of Investment Companies.
It is one of 20 trusts that have increased their annual dividend for more than 20 consecutive years. In Merchants’ case, it has pushed up its dividend in each of the past 36 years – and is on course to make that 37 in the coming months with a hike for its financial year of at least 4.4 per cent.
The trust’s biggest stakes are all in traditional income-friendly companies such as GlaxoSmithKline, HSBC and Legal & General.
Yet he is quite happy to hold companies outside the main FTSE 100 Index – the likes of Keller – if they can deliver a growing dividend.
A third of the largest 350 companies by market capitalisation have yields in excess of five per cent. Gergel is also content to hold on to shares even if a strong share performance results in a drop in the dividend yield.
Gergel acknowledges that there are now more risks in the domestic economy than there were because of procrastination over securing a Brexit deal. He says: ‘Companies are putting on hold investment decisions.’
Merchants is an ideal holding for income investors. Dividends are paid quarterly and returns are not denuded by the trust’s management costs, with the overall ongoing charge working out at a modest 0.58 per cent.
The trust also has nearly a year’s income stored away in reserve that it can draw upon to protect shareholders’ income if the economy cuts up rough and companies rein in dividends.
The only slight drawback is that the trust does have some £112million of borrowings that carry an annual interest charge just above six per cent.
Although Gergel insists this is not a millstone for the trust, it does mean that for the borrowing to deliver a positive outcome for shareholders, the manager must deliver investment returns in excess of the debt’s cost.
Over the past year, Merchants produced an overall return of 6 per cent. Over three and five years, the equivalent figures are 37 per cent and 23 per cent.