Scottish American 02 May 2024

Scottish American (SAIN) is designed to be a core holding for investors seeking income. Its management team, led by James Dow, invests globally in pursuit of dividend growth. Income growth is prioritised over high yield, and James looks for companies which can deliver real growth in cash flow and earnings over the long term, meaning they should be able to deliver real growth in dividends.

The core of the proposition is a portfolio of equities with a bias to high-quality compounders, so exposure to growth companies and technology companies is higher than the typical equity income portfolio. Companies will be bought with a low current yield if James thinks they will be able to deliver attractive, above-inflation dividend growth. This portfolio is supplemented with a higher-yielding property portfolio, currently worth c. 9% of the total portfolio, and smaller positions in bonds and infrastructure equities, which also help boost the yield. At the time of writing, the yield is 2.8% versus an AIC Global Equity Income sector average of 3.6%, but SAIN (usually referred to as SAINTS) has delivered 50 consecutive years of Dividend growth, making it one of the AIC’s Dividend Heroes.

The trust has delivered attractive total returns to investors over the long run, with a low beta to equity markets and lower than benchmark volatility. As we discuss in the Performance section, from 2015 to 2021, the trust outperformed the sector and the FTSE All World Index benchmark each year. The trust also outperformed the index in the down year of 2022, although while it delivered positive returns in 2023 it was behind the benchmark. Having less than the index in the ‘Magnificent Seven’ held the trust back a bit, while the non-equity holdings underperformed equities.

Like most investment trusts, SAINTS’ Discount trended wider over 2023, and at the time of writing it is well below its five-year average, at 9% versus 0.5%.

SAINTS gives up a bit of yield in order to deliver income growth. To see how this has worked in practice, we looked at the track record since 2003, when Baillie Gifford took over management. Over this period, the dividend has grown by 4.3% per annum while UK CPI has averaged just 2.8%. The upshot is that the dividend has grown by 2.4 times, and an investor would now be receiving a yield on their original investment of 7.6% (it was c. 3% in the first year). Twenty years is a reasonably likely length of time for a retirement to last, and so we think this profile should appeal even to income investors in drawdown, as it should help support the real purchasing power of any income being taken. However, given the low starting yield, we think any such investor would be most likely to hold SAINTS alongside higher-yielding funds with less income and capital growth potential.

The discount that has opened up over the past year could have created an interesting long-term entry point. However, we note that discounts have widened across the investment trust sector over the period, and this may reflect a lower appetite for equity investments in a world of higher rates. If rates are slow to decline, we think this could see discounts remain wide in the short term, at least in the absence of corporate activity. While SAINTS has issued shares in nine successive years, at the time of writing it has not bought any back since the discount emerged.