Fund Profile

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Overview
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Overview

Dunedin Income Growth Investment Trust (DIG) recently continued its strategic evolution after shareholders voted to formally incorporate ESG principles into the trust’s investment objectives. This follows an evolution in recent years towards a greater focus on dividend growth at the expense of initial yield. DIG remains invested primarily in UK equities, looking for dividend and capital growth.

Supported by substantial revenue reserves, the managers have migrated DIG’s portfolio to a greater emphasis on income growth, as discussed under Dividend. DIG currently yields c. 4.1% and has now grown its dividend in 37 of the last 41 financial years (and has maintained it in the other four years). Driven in part by the strong emphasis on quality characteristics and financial strength in the stock selection process, DIG’s revenue generation proved significantly more resilient than the wider market to the challenges posed by the economic environment in 2020.

The resilience of many of the underlying companies to the wider macroeconomic environment in 2020 helped DIG to outperform over the calendar year. This followed a trend of strong relative returns in recent years, though the post-vaccine outperformance of value and cyclical stocks posed some headwinds to relative performance at the start of 2021, as discussed under Performance.

Whilst ESG factors had historically been incorporated into the stock analysis process as part of the team’s assessment of quality (see Portfolio), at the most recent AGM it was agreed to formally incorporate ESG policies into the investment objectives. As we discuss under ESG, this has seen the application of several rules around portfolio construction going forward, and has also seen the team exit certain positions to meet the new criteria.

DIG’s discount has narrowed notably in recent months to its current level of 1.5%.

Analyst's View

DIG is positioned and managed with a view to offering ‘core’ UK equity income exposure, and we would suggest that the portfolio output matches these criteria. Income investors will doubtless find the consistent track record of dividend growth and ability to support future dividends from revenue reserves reassuring, and we think that an ongoing recovery in market-wide dividends is likely to be reflected in DIG’s revenue account. The benefit of hindsight proves the shift away from an absolute focus on maximising yields to have been prescient, as elevated payout ratios in many FTSE 100 companies could not be sustained in 2020 whilst DIG’s revenue generation remained reasonably robust.

Some investors will find the incorporation of ESG into DIG’s investment objectives attractive, and this could potentially serve to widen the shareholder base and help maintain the newly narrower discount level. It is worth noting that many of the areas from which DIG is now excluded or to which it only has restricted exposure are typically high distributing, as seen by the disproportionate impact on revenues from the stocks exited (16% of income from 8% of the portfolio). However, the managers are confident that they can reinvest this capital while maintaining the yield. In our view the re-rating higher in many of these stocks would likely have seen the trust’s value-aware managers reduce these positions in any event.

bull bear
Returns have been strong in recent years
Writing of call options could prove a relative headwind if UK market moves rapidly higher
Substantial revenue reserves in place to support the dividend
Gearing can exacerbate downside, as well as amplify upside
Structural incorporation of ESG will appeal to some investors Rate of dividend growth, as with the market, likely to be muted in the near term
Continue to Portfolio

Fund History

27 Apr 2022 Fund Analysis
DIG is the only UK Equity Income trust with an explicit sustainable investing mandate…
18 Aug 2021 Fund Analysis
DIG’s shareholders recently voted to incorporate ESG into the trust’s investment objectives…
11 Aug 2021 In at the deep end
Does seeking out wider-than-usual discounts help investors systematically outperform in the UK trust space?
03 Mar 2021 Strength in depth
UK Equity Income trusts have done a heroic job of maintaining their dividends through the pandemic...
03 Mar 2021 Fund Analysis
DIG offers a high yield backed by large revenue reserves…
29 Jul 2020 To be, or not to be (geared), that is the question
Gearing is part of the toolkit that trusts use to outperform OEICs. But how is it best implemented?...
20 Jul 2020 Fund Analysis
Seeking to grow income, and with substantial revenue reserves, DIG invests primarily in UK companies...
01 Jul 2020 Oh the humanity...
We consider two strategies to cope with markets which, boosted by massive government support, may be witnessing the start of a ‘melt-up’ which may be followed swiftly by a melt-down...
15 Apr 2020 Hold fast
Investment trusts' revenue reserves could make them a vital stronghold for investors facing UK dividend cuts of as much as 47%....
16 Jan 2020 Fund Analysis
Seeking to grow income, and with substantial revenue reserves, DIG invests primarily in UK companies...
17 Jul 2019 Ready for action
In the second part of our active management series, we assess the most active managers across the major closed-ended equity sectors…
07 May 2019 Fund Analysis
Run by Ben Ritchie and Louise Kernohan, Dunedin Income Growth is a turnaround story starting to bear fruit...
01 Oct 2018 Fund Analysis
A UK-focused equity trust, which aims to generate a growing income while achieving capital growth in excess of the FTSE All Share...
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