Trusts try balancing act with dividends

BRITISH companies will continue to cut dividends next spring unless the economy recovers, according to the latest review of investment trusts by S G Warburg Securities.

Warburg has looked at the total cost of the last year's dividends on income-producing shares, but not preference shares, and noted what percentage of that was covered by the trust's reserve funds. This gives an indication of the trust's ability to maintain pay- outs should dividends from its underlying investments fall.

Lewis Aaron, an investment trust analyst at Warburg, said a low score did not necessarily mean a trust was a bad buy for those seeking income. 'It could be that the revenue in the portfolio will not fall, because the managers pick companies which will maintain their dividends. Or they could use other techniques to maintain income,' he said. 'Also the younger a trust is, the lower the reserves are likely to be. Trusts like Dunedin Income Growth and Foreign & Colonial High Income have been going for donkeys' years.'

Other trusts, such as Derby, were set up aiming not to build up a reserve. David Lewis, a director of Derby Trust, said: 'Our articles of association state that we have to pay out all income to shareholders.'

In the present environment, it would be comforting to have the cushion of revenue reserves, but he pointed out that when dividends were rising, shareholders benefited.

Other trusts, such as Scottish National, have a ceiling on the amount of reserves they can build up. Trusts with high scores may be those that pay relatively low dividends to shareholders. 'TR Technology has a very low yield,' Mr Aaron explained.

Some trusts, such as M & G Income and M & G Recovery, are too new to have supplied a full year's accounts.

----------------------------------------------------------------- INCOME-PRODUCING INVESTMENT TRUSTS ----------------------------------------------------------------- The best % 1 TR Technology 187.9 2 Temple Bar 102.6 3 Murray International 74.6 4 TOR 71.0 5 Value & Income 66.3 The worst 42 Save & Prosper Linked/Aberforth Split 4.7 44 Gartmore Scotland 4.5 45 Scottish National 3.6 46 M&G Dual nil 47 Derby Trust nil ----------------------------------------------------------------- Percentage of last year's dividends covered by revenue reserves Source: SG Warburg Securities -----------------------------------------------------------------