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UK companies have a lengthy history of paying dividends, which makes UK equities a fertile hunting ground for those investors looking for long-term growth in their income and capital. However, a perennial criticism of income investing in the UK market is that dividends are concentrated in a handful of companies and sectors, leaving income-seeking portfolios unbalanced. We have designed the investment process on the BlackRock Income & Growth Investment Trust to avoid this pitfall.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
We want to make sure that the vast majority of the trust’s performance comes from stock selection, rather than, a tilt towards a particular style like value, size or growth. . We believe this helps avoid significant swings where the trust moves in and out of favour, bringing a more consistent return for shareholders.
Dividend income in the UK equity market
While it is true that dividend income is concentrated in the UK equity market - with almost half of the UK’s dividends coming from just five companies1 - there is still real choice in the market. The dividend yield on small and medium-sized companies, for example, is competitive with that of the larger companies2. As a smaller trust, we have the flexibility to look across the market, rather than limiting ourselves to the largest companies.
How BlackRock achieves a growing dividend yield alongside capital growth
Our approach in achieving the Fund's investment objective of generating an attractive and growing dividend yield alongside capital growth is to look at three main types of company. The first segment is ‘income generators’, also known as growing dividend stocks. These comprise 70% of the portfolio and are companies with high and sustainable cash flow contributing to a growing dividend. This might include companies such as Relx, Next or AstraZeneca, all long-standing holdings for the trust3. Next, for example, has consistently strong cash flow. Its strong management team has led it through tough times for the consumer sector and allowed it to keep returning cash to shareholders and buying back its own shares4.
Additionally, we look to identify and invest 20% of the portfolio in ‘growth’ companies that have significant barriers to entry and scalable business models that enable them to grow consistently. This might include companies such as private equity and infrastructure specialist 3i Group3.
We also look for turnaround companies, accounting for up to 10% of the portfolio value, which represent those companies that are out of favour with the market, facing temporary challenges yet offer significant recovery potential. This might include companies such as global testing business SGS4, which has recently brought in a new and well-regarded CEO5. We are hoping that she will be able to reinvigorate the prospects of the organisation and to improve operational effectiveness. WH Smith was another recent example in the portfolio.3
This approach means we're not limited to only buying a particular type of company when looking for investment opportunities. It also means we can be flexible in different environments. For example, there will be times when investors become excited about a specific area and shares can become overvalued. In this case, we can pivot away from a specific type of company and look for opportunities elsewhere.
This balanced portfolio should give our investors a more consistent journey on route to long-term total returns. We recognise that markets can be volatile, and it is difficult to stay invested when capital values are bouncing around. By not having significant style tilts, we avoid the highs and lows of some of our more style-driven peers. We believe this creates a more stable experience for our investors.
1 Computershare - Dividend Monitor Q1 2024 - April 2024
2 FT - Markets Data - 10 July 2024
3 Trust Intelligence - Keplar View - January 2024
4 BlackRock - BlackRock Income & Growth investment trust interim report - May 2024
5 SGS - Executive Committee - March 2024
Risk Warnings
Investors should refer to the prospectus or offering documentation for the funds full list of risks.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
Trust-specific risks
Counterparty Risk
The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Gearing Risk
Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
Liquidity Risk
The Fund's investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair.
