BMO Capital & Income 30 March 2022

The objective of BMO Capital & Income (BCI) is to generate capital and income growth from a portfolio of UK listed equities. The manager, Julian Cane, has now managed the trust for a quarter of a century and, as we discuss in the Performance section, has outperformed the FTSE UK All-Share Index benchmark over the long and medium term. BCI has grown its dividend every year since 1992, hence the Association of Investment Companies (AIC) has awarded it ‘Dividend Hero’ status and, as discussed in the Dividend section, the trust is on track to continue to grow its payout once again.

BCI currently yields 3.7%. Although this is higher than the FTSE UK All-Share Index, it is lower than the UK Equity Income peer group average. This reflects Julian’s philosophy of not sacrificing total returns and sustainable dividend growth for current yield. To this end Julian has tilted the portfolio towards mid cap companies with good growth prospects, limiting exposure to the large, lower growth, incumbent dividend payers that are common in UK equity income portfolios (this is discussed in detail in the Portfolio section). This has been accompanied by increased concentration in the portfolio, Julian shifting from holding over 70 to around 50 stocks.

BCI has a wide ownership base of smaller retail investors that re-invest a significant portion of their dividends, likely due to the strong track record of dividend growth, performance and stability of management of BCI. This creates a strong underlying demand for shares that has kept BCI trading near par, reducing discount volatility as discussed in the Dividend section.

We think BCI will appeal to income investors looking for the features of a ‘core’ UK equity income strategy: a cost-effective exposure to the UK market that offers a yield higher than the FTSE UK All-Share, reliably growing dividends and potential for outperformance without excessive extra risk. With a relatively low OCF of 0.59%, a yield above the benchmark’s, an exemplary track record of consistent dividend increases and Julian’s long term outperformance BCI ticks all these boxes. The stability of the trust’s discount, which has generally traded around par, is also an attractive feature for a long term, core holding.

However, we think BCI is differentiated from other trusts in the UK Equity Income peer group that are often thought of as fitting this ‘core’ category. The concentrated portfolio with significant exposure to mid-sized companies with attractive growth prospects offers income investors scope for good total returns alongside the market-beating yield. By avoiding chasing yield and investing in companies that will grow dividends organically, Julian is also putting the long-term future dividend growth of BCI on a sound, sustainable basis. In the shorter term, the focus on buying companies with strong pricing power could provide inflation protection to investors if the currently high inflation rates, as at the time of writing, persist (the outbreak of war in Ukraine making this more likely).

The low exposure to the large, incumbent dividend payers that are common in UK equity income portfolios also means that BCI is complementary to other, more traditional or passive exposures to the UK market.