Investing for income has been no easy task over the past several years as value stocks, which typically offer higher payouts, have been left behind by fast-growing, non-dividend-paying technology companies. 
Last year was a particularly low point for dividend-needy savers, with companies forced to cut, suspend or cancel their payouts in an attempt to preserve cash and stay afloat during lockdowns.
In 2020, global dividends fell 10.5% to $1.3trn (£940m), according to the Janus Henderson Global Dividend Index.
Income investors that bought into the Scottish American investment trust, however, would have avoided the worst of the cuts. The trust upped its dividend from 11.88p to 12p, while its underlying portfolio only suffered a 3% fall in payouts.
Performance of trust vs sector and benchmark under managers’ tenure
Source: FE Analytics
The trust has also returned 62.9% since FE fundinfo Alpha Managers James Dow (pictured) and Toby Ross took charge in 2017, the second-best figure in the IT Global Equity Income sector.
Below, Dow tells Trustnet why investors should continue to back his trust, how he looks for new companies, and why the portfolio is so heavily weighted to Europe.
What is your process for picking stocks?
Firstly, we search the world for companies that are likely to grow strongly for the next decade. Next, we check that they are willing and able to hand over their dividends alongside their profits. Then we hold onto them like a partner for life, not one-night stands.
We look at a lot of different metrics, but the process is more nuanced than just the numbers. One of the key things we look for, for example, is if a firm is going to be run by great people. We focus on that more than the earnings before interest, tax, depreciation and amortization (EBITDA) or something like that.
Why should investors pick your trust?
The same cornerstones that have underpinned the performance for the past 17 years – when Baillie Gifford took charge in 2004 – will be just as strong in the next decade or more.
We also have an unusually long-term time horizon, which most managers do not, and ignore benchmarks, instead looking for the best dividend growth companies in the world. This will continue to work for the next 10 to 20 years, or for however long the board continues to employ us.
How risky is your trust?
There definitely is a risk, but I would say the portfolio is low risk in comparison with other global portfolios. This is because we are looking for 10 years of dividend growth, so have set a really high bar for entry.
The proof I can give you of that is our dividends fell by 3% last year. Even this was due to selling stocks rather than dividend cuts, so as global funds go, this is pretty low risk.
What have been your best and worst calls over the past year?
I object to the question on the grounds that all of our recommendations are based on five-year periods as we are trying to hold stocks for multiple years, so we would normally not give too much attention to a one-year return.
However, since you ask, our best investment has been Albemarle, the world’s largest lithium producer, which has made 140% over the past year. Our worst has been B3, the Brazilian financial exchange, which is down 25%. We still think on a 10-year view that it will go up a lot however, as will Albermarle, so we still own both.
You have a high allocation to Europe. Is this normal?
We are benchmark agnostic, so the Europe weighting has come about because the dividend growth companies that we like happen to be there. It is not that we have a view on European growth.
I think a lot of fund managers start with a benchmark and work backwards. We think about whether we like a stock, rather than where it is listed.
Portfolio breakdown
Source: Baillie Gifford
Which stock in the trust are you most excited about?
Novo Nordisk, the Danish insulin maker. I think it has an unparalleled growth opportunity in the years ahead for its new obesity treatments.
It has discovered an appetite suppressant which has yielded incredible results and now has the rights for sale. People who need meaningful weight loss are now using it and that is a huge opportunity for the company.
Do you incorporate ESG in your trust?
Yes. On a decade-long timeframe, ESG issues are critical to get right. Environmental or governance issues can really screw up a 10-year growth case, so part of our research makes sure companies are going to behave well. Without ESG we do not think there can be sustainable dividend growth.
Are there any sectors you won’t invest in?
It is very hard for us to see companies in the fossil fuels sector delivering profit growth that we look for over the next 10 years, so we don’t own any. Although we don’t have formal exclusions, in practice I do not see us investing in that sector.
You have 10% gearing. Can you explain why?
We modestly gear the trust and then invest it in higher-yielding assets outside of equities that can top up the income stream a bit, including bonds, property and, more recently, we have added infrastructure.
That 10% level is quite typical and will be going forward as we do a lot of stress testing to make sure that in a crisis, the debt will never be an issue and will always be serviceable. We are comfortable with the current level.
What do you do outside of fund management?
I have a great love of analogue things as opposed to digital things. So that could be anything from typewriters – I have an excellent collection – to clocks or manual gearboxes etc. These types of things I love.
I feel like when I go to work, I am looking to the future, but when I get home I get to study the past. However, I use the internet to buy things. If I want to buy a Remington typewriter from 1929, I can find it online.