Dividends hit record high as wealthy investors abandon pensions

·2 min read

Dividends from investment trusts have hit a new record high of £5.5bn this year, thanks to a surge in payouts from privately owned companies not listed on stock markets.

Two thirds of investment trust dividends are now paid by trusts focused on so-called "alternatives" such as venture capital and renewable energy infrastructure, according to Link, the financial data firm.

Overall, dividends rose by 15pc in the year ended in March. But this was driven by investments in areas such as venture capital, property and renewable energy infrastructure, where dividends jumped by more than a quarter to £3.65bn.

The biggest increase came from venture capital trusts, which handed shareholders £556m between April 2021 and March 2022, up by almost two-thirds compared with the year prior. Renewable energy infrastructure funds were a close second, with payouts growing by 38pc to £583m.

Alternative investment trusts have become increasingly popular as investors seek new ways to diversify the traditional stocks that they hold in their portfolios. Last year was a record for new trust launches, with 13 new companies attracting more than £3bn.

In 2010, alternative investment trusts contributed less than a third of the dividends paid by the sector overall, compared with two thirds in 2021.

Ian Stokes, of Link, said that VCTs in particular had become more popular thanks to their generous tax breaks, especially after the reduction in the lifetime allowance on savers’ pensions.

“The measure has deterred pension saving among wealthier individuals who have looked elsewhere for tax-efficient options for their capital,” he said. “With a 30pc tax credit on capital subscribed in a VCT share issue and all income and capital gains tax free, VCTs are the first port of call for many investors now.”

Meanwhile, payouts from trusts that invested in traditional listed stocks remained flat at £1.85bn, as they tried to rebuild their cash reserves, Link said.

Investment trusts’ ability to build up emergency cash piles helped keep payouts steady during the pandemic, with a peak-to-trough decline of just 2pc. However, it led to a 7pc drop in their revenue reserves in 2021.

Link now expects that dividends from trusts that invest in stocks will rise by just 4pc in the next year to £1.92bn, compared with 12.5pc, to £87.5bn, expected in the wider British stock market.

Link also found that British dividends have rebounded by a third in the year ended in March, but still have not recovered to their pre-pandemic highs.

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