Income investors looking at the UK can end up owning the same handful of banks, miners and oil majors. Dunedin Income Growth Investment Trust has taken a different approach, and it now offers the highest yield in its sector by holding very few of the usual dividend-paying suspects.
The trust, one of the oldest on the market at 153 years, is run by Ben Ritchie and Rebecca Maclean at Aberdeen. Speaking at a recent UK Investor Magazine event, Rebecca Maclean detailed the trust’s approach to income, including how the board reset the dividend to 6% of NAV, a one-off step up from which it intends to grow the payout each year.
That puts the prospective yield at around 6.5%. The shares have returned more than 14% over twelve months and still trade at a discount of about 7% to NAV.
Differentiated approach to income
Roughly 36% of FTSE 100 dividends come from banks, oil and gas, and mining. In Dunedin’s portfolio, those sectors account for nearer a quarter, and none of the benchmark’s eight largest payers this year appears among the trust’s own top eight.
Instead, Dunedin’s managers seek income that holds up when conditions turn. Holdings include National Grid, steady compounders such as RELX, and TotalEnergies, which has kept its dividend intact for 15 years while British oil majors cut theirs.
The pandemic was a real-world test. UK dividends fell by around 30% in 2020, while the income Dunedin received from its holdings only dropped by about 10%. This bodes well for further bouts of volatility. The trust can lag peers in terms of capital appreciation when the market rises, but it offers greater stability in downturns.
Dunedin Income Growth Investment Trust portfolio
The trust holds 37 stocks, and most of the money sits in what the managers call quality compounders. These are companies such as RELX, Softcat, Kainos and ASML that reinvest their profits and keep growing through the cycle. Their headline yields are modest, but their dividends tend to rise faster and more reliably than the market’s.
About 30% of the portfolio is in quality cyclicals, among them TotalEnergies, NatWest, Standard Chartered and Rio Tinto. They bring higher yields today and help keep the portfolio from leaning too heavily on one investment style.
Technology and industrials are the biggest overweights, while consumer staples, basic materials and telecoms are underweight. Information services and software make up around a fifth of the trust, and that position suffered earlier in the year as investors worried about AI disruption. McLean thinks those fears were overdone. RELX’s legal arm, supposedly the business most at risk, is now growing at around 10%.
Quality UK stocks
The managers are also happy to explore the market cap spectrum while keeping its focus of quality companies. About 40% of NAV is in companies worth under £10bn, double the benchmark’s weighting, and mid caps have been a particularly rich source of ideas.
The UK equity income sector naturally leans towards value stocks. Dunedin’s emphasis on quality gives it a blend of value, growth, and core holdings much closer to the wider market than exclusively blue-chip portfolios. For investors who already own a more traditional income trust, that makes it a complement rather than a replication of a strategy you may already have.